"SMEs are leaning more heavily on existing resources, particularly cash deposits, rather than seeking new finance."
- David Raw, managing director of commercial finance at UK Finance
The latest business finance data from UK Finance 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, UK Finance says.
In the third quarter, there was a slight decrease in the number of approved loans and overdrafts from Q2, with the trend of more overdraft approvals compared with loans continuing.
One factor that could be limiting demand for new finance is the availability of a still significant stock of cash deposits. UK Finance's 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%. Both current and deposit account balances are still significantly up on pre-Covid levels (19% and 16% respectively).
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.
UK Finance's data does, however, point to businesses retaining a good deal of headroom within existing IF/ABL facilities, with utilisation falling to 60% in the most recent quarter, from 66% a year ago.
Looking ahead
This year SMEs have proved resilient when faced with continued uncertainty and UK Finance says its latest figures point to a stable picture for SME finances.
Looking ahead, businesses are being understandably cautious about taking on new finance and UK Finance added that they "don’t expect this picture to change significantly in the coming quarters".
It added: "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 at UK 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.”
