Lending among challenger and specialist banks reached a record high of £35.5bn in 2022, according to new research from the British Business Bank.

This figure exceeded lending by major banks during the period, giving challenger and specialist banks a 55% share of the market.

The British Business Bank’s Small Business Finance Markets 2022/23 report, published today (1 March), revealed that gross bank lending to smaller businesses in 2022 was £65.1bn, an increase of 12.8% in 2022.

The report also revealed that the smaller business asset finance market reached a record level in 2022 with an increase in new business of 11% in 2022 to £22.1bn. This was driven in part by some easing of supply chain shortages and by rising asset prices.

Data also showed that equity finance markets are adapting to growing demand for investment in green innovation, with net zero deals outperforming the wider equity market. The British Business Bank stated that these deals currently make up 12% of all smaller business equity deals, compared to just 5% in 2018, while deal values are rising at a faster rate. The report showed the investment value of deals related to net zero rose by 184% over the past year, soaring to a new record level of £1.7bn.

British Business Bank CEO, Louis Taylor, said: “Today’s report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options. There are promising signs of growth in the net-zero deal sector as equity finance markets respond to growing demand for investment in green innovation.”

According to the report, the figures do show a considerable drop in the demand for external finance.

In Q3 last year, just 33% of smaller businesses were using external finance, compared to 44% the year prior. Gross lending grew despite fewer smaller businesses using finance, as they sought larger loans to support their business due to inflationary pressures. Furthermore, the report’s findings show that success rates for those seeking loans fell sharply from 80% to 64% year-on-year.

“Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance,“ Taylor added.

“At the British Business Bank, we are committed to supporting these businesses as they seek to achieve sustainable growth, and in turn boost economic productivity, by improving their access to external finance.”

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