North East smaller businesses lose appetite for external finance as confidence falters, find latest British Business Bank research

Across the North East, 45% of smaller businesses used external finance in the first half of 2024, down from 61% in the second half of 2023. However, this still remains above the first half of 2023, at 44%, and the second half of 2022, when only 38% used external finance.

This drop in usage was predominantly across the core finance types. Credit card usage fell by 13 percentage points to 15%, while bank loans fell 13 percentage points to 6%, and overdraft usage fell 15 percentage points to 5%.

Unsurprisingly, smaller businesses’ propensity to consider using finance for growth purposes across the North East also dropped in the first half of 2024, although it remained much more resilient than finance usage rates. 34% of smaller businesses stated they would be happy to use external finance to grow, dropping from 37% in the second half of 2023 and marking the second successive half-year drop.

However, despite this subdued sentiment, there is already evidence that activity is beginning to pick up in 2024. In the first three quarters of 2024, The North East was the only region to see growth of 2.4% in the volume of equity activity compared to the same period in 2023, with 42 equity deals completed across the region. This occurred alongside an impressive growth in deal value of 63.4%, rising to £92.1m over the same period.

Shaun Fooy, Senior Network Manager, North East England & Tees Valley, British Business Bank, said: “It’s no secret that the last few years have been more challenging for smaller businesses right across the UK. Here in the North East, a number of economic headwinds have led to drops in confidence, ultimately leading to declines in external finance usage. Against this backdrop, it’s essential that smaller businesses have access to the financing they need to grow and, ultimately, drive forward regional economic growth.

“The North East is home to some truly innovative businesses, so it’s our job to ensure they have the right support to continue driving this forward. That’s why it’s so encouraging to see a rise in equity deals across our region, signalling that there’s still plenty of opportunity and ambition to unlock business growth. We’ve already seen this uptick through the deployment of the Northern Powerhouse Investment Fund II, having completed a number of exciting deals in our region.”

The national picture

The proportion of smaller businesses accessing finance fell from 50% in Q3 of 2023 to 43% in Q2 of 2024, most likely due to business confidence remaining low despite some recent economic growth.

The report also finds that smaller businesses generally invest less than larger businesses relative to their turnover. In 2024, smaller businesses invested an estimated £12.3bn, while larger businesses invested 2.25 times as much (£27.7bn), despite larger businesses contributing slightly less turnover to the economy (48%) than smaller businesses (52%).

The report finds that smaller businesses who believed they have underinvested most commonly cited ‘credit being too expensive’ (58%), or that they ‘could not borrow at a reasonable rate’ (55%) as key factors for not investing in their business.

77% agreed that they would accept a slower growth rate rather than borrowing to grow, with only 7% disagreeing, suggesting a strong aversion to taking on debt for investment.

Louis Taylor, CEO, British Business Bank, said: ““If we are to achieve the growth we all want in the UK economy, it is important that we continue to make the case for business investment which can help drive economic growth, lift wages and improve living standards.

“The diversity of supply of finance, in terms of both product and provider, is an important factor in meeting the diverse needs of the UK’s highly varied smaller business community. The increasing role for challenger banks in 2024 is an encouraging sign, as is the continued rise of asset finance.

“The findings from this report further emphasise the need to ensure smaller businesses across the UK’s Nations and regions have better access to the finance they need to invest. We will continue to support UK economic growth by helping them find the capital they need to start up, scale up and stay in the country as they realise their full potential.”