SMEs relying on savings rather than new lending in Q3

UK Finance today releases its latest Business Finance Review which reports on the finance needs of small and medium-sized enterprises (SMEs) in the third quarter of 2023.

UK Finance today releases its latest Business Finance Review which reports on the finance needs of small and medium-sized enterprises (SMEs) in the third quarter of 2023.

Gross lending

UK Finance’s latest data shows £3.5 billion was lent to SMEs in the third quarter of 2023. This represents the fifth consecutive quarterly fall, while gross lending is down by just over a fifth when compared to 2022.

Demand uncertainty, higher interest rates, and the impact of lending taken out during the pandemic have all contributed to the weakness in gross lending this year.

 

Gross lending to SMEs

Approvals

In the third quarter, we saw a slight decrease in the number of approved loans and overdrafts from Q2, with the trend of more overdraft approvals compared with loans continuing.

The steady drop in overdraft approval numbers over the past year may be because cost pressures have eased, meaning that cashflow finance is not needed as much as during peaks last year.

Number of approved loans and overdrafts by size​​​​​​

Deposits

One factor that could be limiting demand for new finance is the availability of a still significant stock of cash deposits. Our latest data indicates that SMEs were drawing on these to a greater degree than seen in the previous quarter, with total deposits falling 4.5 per cent. Both current and deposit account balances are still significantly up on pre-Covid levels (19 per cent and 16 per cent respectively).

Spotlight: Accommodation and food services

One of the standout differences between SMEs in accommodation and food services and the rest of the economy is the pace at which they have drawn down on savings. In the first half of 2022, deposits in the sector fell 12 per cent compared with a fall of just over three per cent in the SME population as a whole. There was a similarly rapid pace of decline in the first half of this year (nine per cent compared with four per cent for all SMEs). And in the most recent three months, deposits have slowed compared with the rest of the economy.

SMEs in this sector have taken on new finance, mostly in new overdrafts to manage cashflow challenges and have used savings to navigate recent cost pressures.

Invoice finance and asset-based lending

Invoice finance and asset-based lending (IF/ABL) saw a similar trajectory to other forms of finance, falling for the fourth quarter running, following robust growth as the economy emerged from the pandemic.

Our data does, however, point to businesses retaining a good deal of headroom within existing IF/ABL facilities, with utilisation falling to 60 per cent in the most recent quarter, from 66 per cent a year ago.

Looking ahead

This year SMEs have proved resilient when faced with continued uncertainty. Despite this, our latest figures point to a stable picture for SME finances. Lenders are ready to support investment plans or help businesses facing difficulties. UK Finance encourages any businesspeople to speak to lenders to find out about the range of options available to them.

Looking ahead, businesses are being understandably cautious about taking on new finance. In 2024 we don’t expect this picture to change significantly in the coming quarters. Until businesses see a clearer path to a stronger and more certain recovery, they are unlikely to be focused on longer term investment and expansion. They will also be aware of the risk of further price shocks, which could erode any remaining cushion SMEs have available.

David Raw, Managing Director of Commercial Finance, said:

SMEs in all parts of the economy continue to face a challenging outlook. Cost pressures may be easing but demand looks set to remain weak in the near term.

“Our data suggests that SMEs are leaning more heavily on existing resources, particularly cash deposits, rather than seeking new finance. The higher interest rates environment will also be suppressing firms’ appetite to borrow.

“A stronger demand outlook is ultimately what SMEs need to be confident to make investment decisions for future growth. And the Chancellor’s recent announcement on ‘full expensing’ of investment could provide an added boost for future plans.

“Lenders are ready to support businesses across the UK. Financial services can help firms navigate current challenges and deliver growth and the sector stands ready to support any SMEs concerned about their financial obligations.

Notes to editor

View the Business Finance Review Q3 2023 here.

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

UK Finance is the collective voice for the banking and finance industry. Representing more than 300 firms across the industry, we act to enhance competitiveness, support customers and facilitate innovation.