With the impacts of Covid-19 and the exceptional provision of finance with the implementation of the government loan schemes, small business finance markets have had an unprecedented past two years. As the first easings of the pandemic began to be seen, many hoped that at the start of 2022 markets could look to move towards finding a return to ?normal? and striving for sustainable growth.

The British Business Bank's (BBB) Small Business Finance Markets report for 2021/22 was published last week. Drawing on a range of sources, including extensively on data produced by UK Finance, it demonstrates how small finance markets evolved through 2021, while offering some predictions for what we may see in the year ahead:

• A move towards normal - Drawing on data provided by our members, the report shows that the bank lending level to SMEs has returned to pre-pandemic regions. The record high seen in 2020 has been driven back down to familiar territory, largely due to lower draw downs in the government loan schemes. The report also highlighted a return to the traditional forms of working capital finance, with UK Finance figures utilised to demonstrate the role invoice finance and asset-based lending products are now providing as a funding tool ?essentially front running the UK's general economic recovery?. These trends were similarly demonstrated in our Business Finance Review for Q3 2021.

• The rise of equity finance - 2021 was also a year for alternative forms of finance to really take off in the SME lending market. Equity markets saw growth across the board, with investment on course to double its 2020 record level. This is a positive development particularly for innovative and ambitious small businesses, with equity investors not only a source of funding but also expertise and contacts.

• High levels of cash deposits - UK Finance data was again drawn upon to show that in Q3 2021 the value of deposits held by SMEs rose to £269 billion - a record high. Data collected in late 2021 also shows that less than half of the smaller businesses that took out finance during the pandemic had spent all of their facility. Smaller businesses sitting on larger deposits of cash have contributed to an eased demand for lending, which we may continue to see reflected in lending figures into 2022.

The BBB also highlights where challenges remain to be tackled if businesses throughout the UK are to reach their full potential for sustainable growth. For example, both ethnic minority and female-led businesses face barriers in obtaining external finance, including discouragement and, in the case of ethnic minority business owners, higher rejection rates. Despite most credit decisions being automated, outcomes do vary between communities due to various factors that can impact application success rates. Activity is under way in the industry to target this through building on existing business support such as mentoring, which would also help build trust and confidence that could go a long way in addressing discouragement in applications.

A range of both demand and supply-side factors are also causing enduring regional disparities to the detriment of those areas with thinner finance markets. Though the regional distribution of bank lending broadly reflects economic activity, London continues to disproportionately dominate important forms of growth finance, such as equity finance. We continue to work closely with members, government and stakeholders to advance efforts to identify barriers, and to ensure that  business owners from all backgrounds and across the UK are given every opportunity to access financial services.

The report does contain cautious optimism for the potential for some recovery and sustainable growth in the longer term. However, with some market areas disproportionately impacted by Covid-19, the uncertain economic outlook and the impacts of recent events in Ukraine reverberating around the world, 2022 is unlikely to be a year free from challenge for UK businesses. Regardless of whether the road to this goal runs smoothly, the BBB's report serves an important reminder of the key role external finance plays in getting there.

Read the British Business Bank's Small Business Finance Markets report 2021/22 here.