Loss of confidence resulted in lower SME borrowing in Q4 2022

UK Finance today releases its latest Business Finance Review Q4 2022 which reports on the finance needs of small and medium-sized enterprises (SMEs).

Our latest review shows that in last year’s uncertain economic outlook and rising interest rates SMEs were more cautious, which was reflected in business borrowing.

Gross lending

Gross lending by the main high street banks totalled £18.4 billion over 2022.  Due to economic uncertainty and rising interest rates, SMEs were more cautious in the latter half of the year with lending slowing particularly in H2.

Chart 1: Gross lending to SMEs

Chart 1: Gross lending to SMEs

In contrast, the number of overdraft applications rose by 22 per cent in 2022 compared with the previous year. This is likely a response to managing rising cost pressures, particularly higher energy bills.  

Across loan and overdraft applications and approvals there has continued to be relatively little sector divergence. This was the case in 2022 and in the final months of the year with all industries seeing a drop in the volume of loans and overdrafts. However, the largest decline in lending was recorded in the real estate sector, and a drop off was also seen in the construction sector.

The appetite for working capital facilities across some consumer facing sectors was a little firmer. For example, the hospitality sector saw an 80 per cent increase in overdraft approvals compared with 2021. This rebound is a sign of the need for cashflow management solutions and a reduction in savings for the sector. 

Chart 2: Number of approved loans and overdrafts by sector   

Chart 2: Number of approved loans and overdrafts by sector

Overall, SMEs have started to use savings built up through the pandemic. SMEs nevertheless had more cash at their disposal at the end of last year than before 2020. Deposits overall were four per cent down on the previous year, although for accommodation and food services deposits were lower at 13 per cent down on the previous year. 

Meanwhile, 2022 overall was a strong year for Invoice Finance and Asset-Based Lending (IF/ABL), with UK Finance members supporting businesses with a total turnover of over £300 billion for the first time ever – exceeding the previous record of £288 billion in 2018.  

Finally, loan repayments remained steady as businesses continued to pay back government-backed loans. 

Chart 3: Value of invoice finance and asset-based lending advances

Chart 3: Value of invoice finance and asset-based lending advances

Despite relatively muted demand for new lending, SMEs still have a good amount of financial headroom. Although the overall picture for SMEs did not change significantly in Q4 2022, there are promising signs that business have a reasonable buffer to manage rising costs and ongoing uncertainty.

Stephen Pegge, Managing Director of Commercial Finance, said:

2022 was a year of two halves. Demand for loan finance from SMEs had stabilised following the end of the government loan schemes and repayments beginning to fall due, but there was a growing need for products to manage cashflow in an environment of sharply rising costs.

However, as the year progressed with more uncertainty about the economic outlook and rising interest rates, SMEs were more cautious, further depressing their appetite for finance and investment, with similar trends playing out across all regions and sectors.

Our data does show the profile of repayments holding steady suggesting that despite the headwinds of 2022, the majority of SMEs continue to show resilience and are managing their Covid-19 debt obligations. We continue to encourage any business concerned about sustaining this to have an early conversation with their lender.

If, as expected, the economic gloom starts to lift later in the year, we should see confidence return and investment plans come back on stream with an associated pickup in demand for finance to support this. In the meantime, lenders will maintain their support for businesses managing cashflow needs.


Area of expertise:

Notes to editor

The full Business Finance Review can be seen here.

For more information please call the UK Finance press office on 020 7416 6750 or email press@ukfinance.org.uk

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