According to new data, lending to small and medium-sized enterprises (SMEs) dropped for a third straight year in 2023 as businesses turned to specialist lenders instead of big banks.
Figures from banking trade body UK Finance showed gross lending to SMEs dropped 22 per cent to £14.3bn in 2023 from £18.4bn in 2022.
The group blamed “demand uncertainty, higher interest rates and the impact of lending taken out during the pandemic” for the weakness last year.
High street banks are facing criticism for “pulling back” from small business lending and implementing “harsh” practices, prompting investigations by the Treasury Committee and Financial Conduct Authority.
Small businesses have been increasingly relying on alternative lenders in recent years. UK Finance found 59 per cent of SME lending now comes from outside the big banks.
However, the data showed some green shoots at the end of last year, suggesting improved business confidence. The final three months of 2023 saw £3.5bn lent to SMEs, the first quarter not to see a decline since the second quarter of 2022.
UK Finance added that the fourth quarter saw a rise in the volume of loan and overdraft approvals by three per cent and seven per cent, respectively, from the third quarter.
Medium-sized businesses saw a more significant increase, with the value of approved overdrafts rising by nearly a fifth and loan approval values increasing by 17 per cent. The accommodation and food service sectors saw particularly sharp increases.
David Raw, managing director of commercial finance at UK Finance, said: “2023 was another challenging year for SMEs as they continued to face uncertain demand and rising borrowing costs.
“There were promising signs that demand for new finance may be turning a corner in the final quarter of 2023. Approvals for new loans and overdrafts increased and the rise was broad-based across all sectors. This could be a sign that confidence is gradually improving.”
The Treasury Committee recently finished hearing evidence for its SME finance inquiry, where MPs have heard from the industry and government about the difficulties small firms face in accessing finance.
The FCA is currently investigating the issue following a super-complaint filed by the Federation of Small Businesses in December. The complaint said banks’ lending practices “excessively demand personal guarantees for business loans” and dampen business growth.
Raw added: “Lenders are ready to support businesses across the UK who need and can afford finance. Those concerned about their financial position or those planning for the future are always encouraged to have early conversations with their lender.”