The Small Business Finance Markets Report 2015/16, published by the British Business Bank, shows that liquidity is returning and finance markets have continued to improve.
Equity finance has seen investment in smaller businesses grew by 43 per cent in the year to October 2015.
In addition, the alternative finance sector saw business lending grow dramatically, increasing by 75 per cent to £1.26 billion in 2015.
Bank lending, which continues to be the main form of finance for smaller businesses, continues to improve too. After several years of contraction, 2014-15 saw four consecutive quarters of positive net bank lending to smaller businesses.
With more than half (56 per cent) of smaller businesses looking to grow their turnover in the next year, it is essential that suitable finance is available to support those growth ambitions.
While the report shows that the market for small business finance is improving, a number of challenges remain.
A lack of businesses scaling up is hampering UK productivity; there remains a need to stimulate a greater volume of scale-up businesses and SME exporters to counteract the UK’s lagging productivity.
OECD data shows that Britain is near the bottom of the table for the percentage of businesses that grow to more than ten employees after three years.
Furthermore, there is a need to deliver further diversity in the small business finance market by accelerating the evolution of a diverse and accessible range of finance options to drive competition and choice for smaller businesses.
The four largest banks still account for 80 per cent of the small business loan market in 2014, with many small businesses not looking at alternative finance options beyond their main bank.
The finance landscape remains uneven across the UK. To help rebalance growth, an increased availability of finance for smaller businesses across the UK is required: some 71 per cent of total SME equity investment is accounted for by London and South East based companies.
Keith Morgan, CEO of British Business Bank says, 'Our second Small Business Finance Markets report reveals the complex picture of the current landscape for finance to smaller business in the UK. While there are encouraging signs that volumes are up and alternative finance markets are thriving, there remain areas that still require attention.'
The Business Bank is increasing its early-stage equity interventions, through its Angel Co-Fund and Enterprise Capital Funds, to support businesses to scale up, Morgan adds.
Minster for small business Anna Soubry adds, 'Even though the lending landscape is improving, I’m well aware access to finance remains a big issue and want to see even more help for small firms looking to invest and create jobs for people.
'The government is taking steps to increase availability of alternative lenders like peer-to-peer platforms and challenger banks, through our support for the British Business Bank.'
Further reading on small business finance
See also: Sources of funding to open a restaurant