To increase the supply of finance to smaller businesses where markets don’t work well.
The challenge for smaller businesses, and why it matters
In some areas of smaller business finance, there is a lack of volume of provision for certain groups of smaller businesses – particularly those that are the smallest, youngest or are growing quickly. Even if they’re viable, such businesses can find it difficult for structural reasons to access finance – a young business, for example, cannot provide a track record of financial performance that providers typically require.
If we help markets address these issues, more UK smaller businesses will be able to unlock their potential – and release wider economic benefits – by accessing a suitable amount of finance of the right type, at the right time. This effort to strengthen provision of finance matters even more when economic conditions are uncertain, with external finance becoming increasingly important for a business’s working capital and cashflow support. By increasing the volume of finance to underserved market areas, we often also simultaneously increase the variety of finance on offer – for example, through new market entrants or new types of finance becoming available. This aspect is covered in more detail under the section which follows.
Background and recent trends
In the six years since the British Business Bank’s foundation in 2014, there has been significant growth in the volume of finance supplied to smaller businesses outside of traditional bank lending products, enabling support for a wider variety of business models of start-ups and smaller businesses. The value of UK equity investment, for example, more than doubled between 2014 and 20191, making the UK Europe’s largest venture capital market. This has enabled an increased volume of support for younger, high-growth companies, whether at the initial ‘seed’ stage or later ‘venture’ and ‘growth’ stages.
This increase in provision is important as, for these businesses, mainstream debt finance is generally inappropriate, given that they typically don’t yet have a stable income to service loan repayments and may be pre-revenue, or pre-profit. Yet the benefits of addressing this structural challenge are clear: these companies are often highly innovative and are likely to make an important contribution to the UK’s future economy. Indeed, some are already doing so – as of October 2019, the UK had 19 equity-funded ‘unicorn’ businesses with a valuation of £1bn or more, the highest number in Europe.2 Even so, more remains to be done, as there continues to be an undersupply of equity finance when viewed against the leading global equity markets, such as the US.3
We have also seen long-term increases in other important non-bank products, such as marketplace business lending and asset finance. Volumes of these rose five-fold and by more than a third respectively between 2014 and 2019, with marketplace lending emerging from infancy into a genuine funding route for smaller businesses, and asset finance further developing its role as a significant alternative product in the market.4 These developments again increase the volume of finance in the market, increasing the likelihood that smaller businesses can access the finance they need.
This progress, however, must be offset against both a long-term downward trend in mainstream bank lending (in 2019, gross flows fell to £56.7bn, the lowest level for five years), and data continuing to show – at least prior to the Covid-19 shutdown – ongoing structural challenges. 84% of SMEs, for instance, were offered the finance they sought in 2019, but for businesses trading for less than five years this fell to 73%.5 First-time applicants and sole traders were also less likely to have their applications for finance approved, with success rates of 69% and 72% respectively compared to an average of 75%.6
Given this, the Bank remains committed to working with as many market participants as possible to deliver interventions that target these ongoing issues.
Clinical Design Technologies
- Region: South West
- Location: Truro
- Programme: Cornwall and Isles of Scilly Investment Fund
Clinical Design Technologies received equity investment from The FSE Group, through the Cornwall and Isles of Scilly Investment Fund, to promote its Urine Testing System technology.
An estimated 100m urine tests are carried out every year in the UK alone, many of which are still conducted with dipsticks that are colour-matched by eye.
Clinical Design Technologies engineered a digital solution which can be used as point-of-care urine testing for healthcare providers, providing standardised results that can be read on a desktop computer and saved to a patient’s electronic healthcare record.
The funding is supporting rollout of the system in the UK and overseas and will allow the business to take on six new staff initially, with further hires planned.
Responding to the challenges, and 2019/20 snapshot
The Bank delivers a suite of finance programmes, across debt and equity, which seek to address the specific challenges within this objective.
For start-ups and younger businesses, our Start Up Loans programme offers loans, business support and mentoring to individuals across the UK looking to start a business, or to grow a recently established business. Although such businesses lack a track record (and often lack collateral), Start Up Loans is designed to accommodate these factors, and addresses a market gap, offering loans outside the risk appetite of commercial finance providers. The programme also plays an important role in providing finance to under-served groups, with the proportion of loans to women, BAME and previously unemployed applicants being significantly higher than in the lending market more generally.
Supporting aspiring businesses
As at the end of March 2020, the Start Up Loans programme had delivered more than 71,500 loans, providing almost £586m of funding since the scheme started in 2012. Government support for Start Up Loans was confirmed when it secured an extension to March 2022 in the March 2020 Budget, allowing up to 10,000 more loans to be made, along with an earlier manifesto promise to extend the programme.
Supporting equity finance at every stage
Young, high-growth businesses – which are typically pre-revenue or pre-profit – are served by our equity programmes, which tackle the range of market failures in this space. The Angel CoFund and the Enterprise Capital Funds (ECF) programmes address the equity gap affecting smaller equity deals. They have channelled significant investment into high potential businesses that would likely otherwise have struggled to obtain funding (delivering £322m and £1.3bn respectively so far, including third-party capital).
Larger high-potential businesses can find it difficult to obtain the significant long-term, or ‘patient’, investment they need to become world-class businesses, as recognised by the government’s 2017 Patient Capital Review.
In response, we established British Patient Capital (BPC) in 2018, with an additional £2.5bn of funding, as well as a £500m Managed Funds programme. Like many of our finance programmes, these schemes aim to attract significant private capital alongside, catalysing the market. For example, BPC has already made £813m of commitments into the market, alongside over £4.8bn from third-party investors.
In addition, the Managed Funds programme also aims to attract significant institutional investment into ‘patient capital’, which has previously been lacking at scale. The volume of this activity means the British Business Bank is the largest domestic investor in venture and venture growth capital in the UK.
Supporting debt finance
For smaller viable businesses which lack sufficient collateral to access finance, we operate our flagship debt programme – the Enterprise Finance Guarantee (EFG). This was established following the financial crisis in early 2009 and has, as of 31 December 2019, supported the provision of almost 33,000 business loans to a value of around £3.5bn. On 24 March 2020, we suspended EFG due to the introduction of the new Covid-19 loan guarantee schemes.
Our Investment Programme, run by our British Business Investments subsidiary, plays a key role in increasing the supply of debt finance through a wide variety of providers. In 2019/20, it made new commitments worth £215m.
We also run two further debt programmes which increase the volume of finance available to address significant structural challenges in the financial infrastructure. Our ENABLE Guarantee encourages lenders to increase their lending to smaller businesses by reducing the high capital costs associated with lending to smaller businesses, particularly for smaller banks. Following product development, in April 2019 we launched a targeted variant of the programme, ENABLE Build, aimed at supporting specialist lenders providing funding to smaller housebuilders.
In addition, ENABLE Funding helps smaller finance providers to access capital markets more cost-effectively than they otherwise could, supporting greater onward lending to smaller businesses. Transactions across both programmes total close to £2bn so far.
2019/20 KPI performance
Our KPI for this objective is ‘stock of finance we support’ through our finance programmes. This includes both our own and ‘leveraged in’ third-party funding. In exceeding our 2019/20 KPI target, we maintain the momentum we have built over the past six years to expand the supply of finance in UK smaller business finance markets.
£7,804m stock of finance supported by 31 March 2020
As of 31 March, £7,966m stock of finance supported
Interim Covid-19 update on Bank activities
In late March 2020 the Bank responded rapidly, at scale, to the national economic crisis brought about by Covid-19. Our increases in capability and market reach since 2014, and our up-to-date knowledge and analysis of smaller business finance markets enabled us to mobilise swiftly to address what was (and remains) an unprecedented situation. This included expanding our strong network of accredited delivery partners, across all programmes, to over 200.7
In last year’s Annual Report, we mentioned we were agreeing a framework with government for our approach in a downturn. Alongside this, as part of our forward resilience work, we carried out extensive implementation planning, as highlighted independently in the National Audit Office’s January 2020 report on the Bank.8 This planning was further intensified in 2019/20, and was available to build on when the Bank was asked by the government to consider how we could support smaller businesses impacted by Covid-19.
The overarching aim was – in common with other Covid-19 economic measures – to provide a ‘bridge’ for businesses through the crisis, safeguarding jobs and the productive capacity of the UK, such that the economy could recover as quickly as possible, once it was safe to do so.
Under the aegis of HM Treasury and our Shareholder, we worked closely with government officials, business organisations and trade associations, financial services stakeholders and others to implement new programmes, all designed to address the major market issues that resulted from the outbreak. These programmes are collectively known as the Bank’s Covid-19 response schemes.
Coronavirus Business Interruption Loan Scheme
We suspended the Enterprise Finance Guarantee scheme and replaced it with a new programme, the Coronavirus Business Interruption Loan Scheme (CBILS). The scheme opened on 23 March, providing up to £5m in finance for businesses with a turnover of less than £45m. The government covers the first 12 months of interest and lender-levied fees, and provides an 80% guarantee to lenders. The programme has 97 accredited lenders and has, as of 11 August 2020, provided almost 60,000 facilities worth £13.4bn.
Coronavirus Large Business Interruption Loan Scheme
On 2 April 2020, the Chancellor of the Exchequer announced a further scheme that shared many of the elements of CBILS, but with larger facility sizes of up to £50m, called the Coronavirus Large Business Interruption Loan Scheme. CLBILS also provides an 80% guarantee to lenders, and is targeted at larger businesses with a turnover of more than £45m. The maximum amount for term loans and revolving credit facilities available through CLBILS to a borrower has now been increased to £200m, with a maximum amount of £50m for invoice finance and asset finance facilities. With 23 accredited lenders, the scheme has, as of 11 August 2020, delivered nearly 500 facilities worth £3.4bn.
On 20 April, the Chancellor announced the Future Fund, a £250m match-funded, convertible loans programme, targeting equity-funded businesses that would be unlikely to be eligible for CBILS. It supports the UK’s innovative businesses currently affected by Covid-19. These businesses have been unable to access other government business support programmes, such as CBILS, because they are either pre-revenue or pre-profit and typically rely on equity investment. The programme can provide investment of between £125k and £5m to eligible businesses. Launched on 20 May, the UK Future Fund received £515m of applications on its first day and due to its popularity, more funding has been made available. It has, as of 11 August 2020, delivered over £560m of funding to 565 high potential businesses.
Bounce Back Loan Scheme
On 4 May, the Chancellor introduced a new Bounce Back Loan Scheme, a demand-led scheme offering lending that targets small and micro businesses, providing loans from £2k up to 25% of the business’s turnover, with a maximum loan of £50k. Providing lenders with a 100% government-backed guarantee and standardising the application form led to a faster process with many loans becoming available within days. The scheme provides a six-year term loan at a government set interest rate of 2.5% a year. The government covers interest payable in the first year and businesses benefit from a 12-month repayment holiday. The scheme has, as of 11 August 2020, delivered over 1.1m facilities to businesses, worth £35bn.
Having utilised existing British Business Bank infrastructure and accredited lenders to enable rapid deployment of the first phase of CBILS, we put in place an accelerated accreditation process for new lenders. By early August we had made more than 100 accreditations across these schemes.
1 British Business Bank, Smaller Business Finance Markets 2020, https://www.british-business-bank.co.uk/wp-content/uploads/2020/02/Small-Business-Finance-Markets-2019-20-report-FINAL.pdf
2 British Business Bank analysis of PitchBook, Beauhurst and other third party data as at June 2020
3 British Business Bank, Smaller Business Finance Markets 2020, https://www.british-business-bank.co.uk/wp-content/uploads/2020/02/Small-Business-Finance-Markets-2019-20-report-FINAL.pdf
4 British Business Bank, Smaller Business Finance Markets 2020, https://www.british-business-bank.co.uk/wp-content/uploads/2020/02/Small-Business-Finance-Markets-2019-20-report-FINAL.pdf
5 British Business Bank, Business Finance Survey 2019, https://www.british-business-bank.co.uk/wp-content/uploads/2020/03/2019-Business-Finance-Survey.pdf
6 BVA BDRC, SME Finance Monitor, YE Q4 2019
7 As of 14 August 2020. All references to the number of Covid-19 scheme delivery partners in the strategic report, whether on an aggregate or per-scheme basis, are as of this date. All other Covid-19 scheme delivery data is as published by government on 11 August 2020
8 National Audit Office, British Business Bank, 2020, https://www.nao.org.uk/wp-content/uploads/2020/01/British-Business-Bank.pdf