Small Business Financial Markets 2018

http://www.techcelerate.ventures
Your trusted advisor for later stage Seed and Series A investment
This report provides a unique, in depth picture of the smaller business nance market. It is intended not only to inform the development of the British Business Bank’s own strategy, but also to inform wider developments in both the market and government policy.
About Techcelerate Ventures

Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.
BUSINESS BRITISH BUSINESS BANK nance SMALLER BUSINESS SMALL BUSINESS SME GROWTH EQUITY invest FINANCE MARKET SMALL BUSINESS FINANCE BUSINESS FINANCE MARKET fund EXTERNAL nance HIGH GROWTH PATIENT CAPITAL London BUSINESS Angel This year
SMALL BUSINESS 
FINANCE MARKETS 
2017/18 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
3 
CONTENTS 
3 
FOREWORD 
5 
EXECUTIVE SUMMARY 
8 
INTRODUCTION 
9 
AGGREGATE FLOW AND STOCK OF FINANCE TO SMALLER BUSINESSES 
12 MACROECONOMIC DEVELOPMENTS 
14 PART A: THEMES 
15 1.1 DEMAND FOR FINANCE 
23 1.2 REGIONAL ACCESS TO FINANCE 
28 1.3 PATIENT CAPITAL FOR SCALEUPS 
31 1.4 INTERNATIONAL COMPARISONS OF SMALL BUSINESS FINANCE MARKETS 
38 PART B: MARKET DEVELOPMENTS 
SMALL BUSINESSES 
39 2.1 SME BUSINESS POPULATION 
43 2.2 HIGH GROWTH FIRMS 
48 2.3 USE OF EXTERNAL FINANCE 
FINANCE PRODUCTS 
53 2.4 BANK LENDING 
58 2.5 EQUITY FINANCE 
64 2.6 DEBT FUNDS 
68 2.7 ASSET FINANCE AND INVOICE & ASSETBASED LENDING 
74 2.8 MARKETPLACE LENDING 
78 GLOSSARY 
82 ENDNOTES 
2 
BRITISH BUSINESS BANK 
SMALL BUSINESS FINANCE MARKETS 2017/18 
FOREWORD 
KEITH MORGAN, 
CEO, BRITISH BUSINESS BANK 
The British Business Bank was established at the end of 2014, with a mission to improve ÿnance 
markets so they more e¤ectively serve the needs of smaller UK businesses. 
This report, our fourth Small Business Finance Markets 
report, highlights a continued and welcome growth in 
ÿnance ow to smaller business outside of traditional 
bank lending products. The value of equity investment 
(up 79% in 2017), asset ÿnance (up 12%) and peer-
to-peer business lending (up 51%) used by smaller 
businesses all showed signiÿcant growth in 2017, 
while net bank lending remained relatively at. 
That smaller businesses are using an increased range 
of ÿnance options is relevant to two of the British 
Business Bank’s key objectives: to increase the 
diversity of supply by supporting new ÿnance market 
entrants and innovative funding models; and to build 
smaller businesses’ conÿdence and awareness of 
their ÿnance options, including through our popular 
Business Finance Guide, co-published with the ICAEW. 
Although traditional banks are still the predominant 
source of ÿnance, it’s encouraging to see smaller 
businesses considering and using an increased 
range of ÿnance options to meet their funding 
needs. We strongly believe that matching smaller 
businesses with appropriate ÿnance options will 
ultimately help them, and the UK economy, develop 
more successfully. 
The British Business Bank uses evidence and research 
to shape and develop our programmes. Three themes 
from this year’s Small Business Finance Markets report 
are already bringing signiÿcant change to our activities: 
enabling greater provision of patient capital in 
the forms of equity and wider growth capital; 
stimulating demand for ÿnance; and tackling 
regional imbalances in ÿnance supply. 
PATIENT CAPITAL 
This report highlights strong evidence that our 
scale-ups need more long-term patient capital 
throughout all stages of their development if 
we want to compete with the US, for example, 
in producing world-beating companies. It echoes 
the themes explored in detail in last year’s Patient 
Capital Review, led by HM Treasury and supported 
by a separate industry panel chaired by Sir Damon 
Bułni. The evidence shows there are some key areas 
where improvements can be made – for example, 
compared to their US counterparts, UK Venture Capital 
funds are smaller on average (£118m compared to 
£180m), and UK businesses that exit receive fewer 
funding rounds (an average of 1.9 rounds compared 
to 2.7 rounds). 
Although the Bank had already begun increasing its 
resources allocated to supporting equity for scale-up 
companies, the Autumn Budget, represented a step 
change in our capabilities. In an innovative package, 
the government allocated £2.5bn of additional 
resources to the British Business Bank, an increase 
of around two thirds on our existing capacity. Along 
with existing resources, this signiÿcant increase will 
unlock up to £13bn of ÿnance to help UK smaller 
businesses realise their full potential and, over time, 
help broaden and deepen these markets through 
attracting private sector capital – the central goal 
of the Patient Capital Review, and one we share. 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
  
  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
  
 
 
  
 
 
 
  
 
  
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
4 BRITISH BUSINESS BANK 
5
SMALL BUSINESS FINANCE MARKETS 2017/18 
TACKLING REGIONAL IMBALANCES IN 
FINANCE SUPPLY 
Demand variations are also apparent on a regional 
basis, compounding the imbalance in supply of growth 
capital across the UK. In 2017 the volume and value 
of equity received by London-based businesses 
exceeded that for the rest of the country combined. 
Angel deals are also concentrated in London and 
the South East. Increasing such activity in regions 
outside London and the South East has the potential 
to help close well-documented imbalances in 
regional growth. 
The Bank is addressing some of these imbalances 
directly through our Northern Powerhouse and 
Midlands Engine Investment Funds – with a fund 
for Cornwall and the Isles of Scilly expected in 2018. 
Whilst these supply-side activities are important, 
we see a signiÿcant potential to rebalance activity 
through better provision of information and building 
capacity in the regions to support ÿrms’ growth 
ambitions. Awareness and consideration of di¤erent 
forms of ÿnance varies signiÿcantly across the country, 
and our renewed e¤orts to close information gaps will 
have a strong regional element. In response to the 
government’s 2017 Industrial Strategy, we are also 
developing an investment programme to support the 
development of clusters of business angels outside 
London, and will be putting in place a network of British 
Business Bank regional managers by Autumn 2018. 
Strong research, evidence and analysis provides the 
basis for our interventions to improve ÿnance markets 
for smaller UK businesses. This report highlights 
areas where we have already begun to respond to 
current challenges, and where we might respond 
further to those that lie ahead. We look forward 
to working with our partners and stakeholders to 
address the growing needs of smaller businesses 
as we do so. 
Two key elements of the Budget announcement are 
being implemented this year: 
• A new £2.5bn Patient Capital entity, incubated 
within the Bank, which will invest commercially 
into venture and growth capital with a view to 
œotation or sale – subject to a value for money 
assessment – once it has built its portfolio and 
track record 
• Using up to an additional £500m, we will 
cornerstone a small number of large scale, 
private sector managed funds of funds, 
which will in turn catalyse patient investment 
into high potential businesses. 
STIMULATING DEMAND 
Supply of ÿnance is, however, just one side of the 
equation and other activities need to be undertaken 
to build capacity and capabilities amongst SMEs. 
One such area is information, which is a fundamental 
building block for ełcient, well-functioning markets. 
Our research shows that this is an aspect of smaller 
business ÿnance markets that could be strengthened 
as, too often, businesses either aren’t aware of or 
don’t understand the variety of ÿnance choices 
available to them. 
The Bank has already taken action to address this 
problem. Thousands of businesses a week access the 
British Business Bank/ICAEW Business Finance Guide, 
which provides information about ÿnance options 
for businesses at all stages of their development. 
We recognise, however, that there’s more to be done. 
We are introducing a more targeted new digital 
information hub in Spring 2018, and will be backing it 
with a substantial promotional campaign to maximise 
its use by smaller businesses. The new hub, which will 
set out ÿnance options in a simple to use format, 
aims to go further in equipping businesses, and 
especially those with growth ambitions, with the 
know-how to ÿnd the ÿnance best suited to their 
needs, enabling them to become the global success 
stories of tomorrow. 
EXECUTIVE 
SUMMARY 
The fourth edition of our Small Business 
Finance Markets report comes at a time 
when the government’s Industrial Strategy 
has reiterated the productivity and regional 
challenges facing the UK economy, and the 
outcome of the Patient Capital Review has 
identiÿed the need for additional action to 
ÿnance growth in innovative ÿrms. 
Improving the growth and productivity of smaller 
businesses is central to improving the performance 
of the economy as a whole. This makes it even 
more important that ÿnance markets are e¤ective 
in supplying funding to smaller businesses when it 
is needed, and that smaller businesses across the 
UK have the ability and conÿdence to attain ÿnance 
appropriate to them. 
This report provides a unique, in depth picture of 
the smaller business ÿnance market. It is intended 
not only to inform the development of the British 
Business Bank’s own strategy, but also to inform 
wider developments in both the market and 
government policy. 
The report structure has been reÿned this year, to 
highlight the major cross cutting themes in Part A, 
with Part B providing a more detailed review of the 
small business sector and developments in speciÿc 
ÿnance product markets. Five key themes emerge 
from our analysis. 
EQUITY AND ALTERNATIVE FINANCE DEMONSTRATED 
STRONG GROWTH IN 2017, WITH BANK LENDING 
VOLUMES RELATIVELY FLAT 
Despite the modest macroeconomic environment, 
small business ÿnance markets have continued to 
provide signiÿcant volumes of ÿnance to smaller 
businesses. Aggregate ows of ÿnance saw 
signiÿcant double digit increases for many products, 
however bank lending was relatively at, resulting 
in an increasingly diversiÿed ÿnance market for 
smaller businesses. 
Most notably, values of external equity ÿnance 
received by smaller businesses rose rapidly, 
increasing by 79% in the ÿrst 3 quarters of 2017. 
Although deal sizes have increased across all equity 
stages, this was partly due to a small number of 
very large deals. The 10 largest equity deals alone 
account for over £1.6bn of the £4.5bn invested in 
the ÿrst 3 quarters of 2017. The number of deals 
however were also up by 12% compared to weaker 
deal activity seen in 2016. This development 
is particularly welcome as equity ÿnance is an 
important input to enabling many businesses to 
deliver their growth potential. 
Peer-to-peer business lending also showed 
continued rapid growth, rising by just over 50% in 
2017. Such lending is challenging traditional bank-
based models of lending, although it remains around 
only 3% of gross bank lending ows. Finally, asset 
ÿnance has continued the consistent low double-digit 
growth which has been apparent for several years. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
7 
6 
BRITISH BUSINESS BANK 
This growth demonstrates increased diversity in 
small business ÿnance markets. As previous British 
Business Bank research on diverse ÿnance markets 
has argued, this helps small businesses get the 
ÿnance best suited to their needs. The Bank’s 
support for alternative lenders continued to grow 
in 2017 with the Investment Programme investing 
through challenger banks, debt funds, asset ÿnance 
providers and marketplace lenders. 2018 has already 
seen two ENABLE Funding transactions with asset 
ÿnance providers. 
CONTINUED EXCELLENT UK PERFORMANCE IN 
GENERATING START¬UPS, IMPROVING IN SCALE¬UPS 
The UK economy has a strong track record 
in generating start-ups. The latest available 
international comparisons show the UK leading 
the G7 in terms of birth rates of new businesses. 
Although death rates have edged up slightly the 
UK small business population has continued to 
increase, rising to an estimated 5.7m businesses 
by the start of 2017. 
International comparison of the share of high growth 
enterprises, who are a key driver of innovation and 
employment, shows a slight increase in the UK, 
whereas it has fallen in countries such as Germany, 
Denmark and Sweden. There remains more to do, 
but it is encouraging to see some signs of better 
scale-up performance in the UK. 
The incidence of high growth enterprises in the 
UK has been relatively stable since the 1990s. 
Yet research by the Enterprise Research Centre 
suggests that a focus on high growth episodes 
experienced by enterprises over their life cycle is 
helpful in predicting future growth potential. Very 
few ÿrms have prolonged high growth, but those 
that have a high growth episode are more likely to 
do so again at a later stage. 
Because of their positive impact on the economy, 
the British Business Bank has increased its support 
for smaller businesses with high growth potential, 
by increasing funds allocated to equity schemes and 
debt products that are suited to those ÿrms. The 
Bank has also played a role in taking forward the 
recommendations of the Scale-Up Task Force. 
THE PATIENT CAPITAL REVIEW IDENTIFIED A NEED 
FOR MORE EQUITY INVESTMENT AT ALL STAGES 
The evidence included in the Patient Capital Review 
consultation drew on British Business Bank analysis 
from our 2017 Equity Tracker Report published 
in August 2017. Despite recent improvements in 
the availability of equity ÿnance in the UK, the UK 
external equity ÿnance to GDP ratio is lower than 
some of our international competitors. The Patient 
Capital Review focused on the availability of late 
stage VC, where funding provision in UK markets 
was noticeably below that in the US and therefore 
potentially hampered UK businesses’ growth potential. 
2016 and 2017 have also seen relatively high 
aggregate amounts of fund raising, but an ongoing 
decline in the number of VC funds closing. This 
demonstrates the continued diłculty emerging 
fund managers have in raising new funds which 
our Enterprise Capital Fund (ECF) programme seeks 
to address. 
As a result of this and other analysis, the 
Patient Capital Review included a number of 
recommendations for British Business Bank equity 
activity to broaden and deepen markets, including: 
• Establishing a new £2.5bn investment fund 
incubated in the British Business Bank with the 
intention to œoat or sell once it has established 
a su¢cient track record 
• Investing in a series of private sector fund of 
funds of scale, with the British Business Bank 
seeding the ÿrst wave of investment with up 
to £500m 
• Continuing to back ÿrst-time and emerging fund 
managers through the ECF, supporting at least 
£1.5bn of new investment. 
NEW 2017 DATA HIGHLIGHTS REGIONAL GAPS IN 
SOME PRODUCTS 
Previous Small Business Finance Market reports 
have highlighted that equity investment tends to 
be clustered in certain cities, particularly but not 
exclusively London, where innovative companies, 
skilled labour and equity investors come together. 
The evidence from 2017 showed that this continued 
to be the case, with the volume and value of equity 
received by London based businesses exceeding 
that for the rest of the country combined. As equity is 
often an important ingredient for growth, increasing 
equity activity in regions outside London and the South 
East could help close disparities in regional growth. 
The joint British Business Bank – UK Business Angels 
Association survey of angel activity, published in 
December 2017, conÿrmed that angel investment is 
similarly concentrated in London and the South East. 
The British Business Bank is taking a number of 
steps to address these imbalances. It is continuing 
to implement the geographically focused funds in 
the Northern Powerhouse and Midlands Engine 
regions. In addition, and as announced at the 
Autumn Budget 2017, the British Business Bank is 
developing a commercial investment programme 
to support the development of clusters of business 
angels outside London. 
The Bank will also be developing a network of 
British Business Bank regional managers to be in 
place by autumn 2018 to ensure businesses across 
the UK know how to access sources of investment. 
That will be complemented by a new digital hub 
developed by the Bank, o¤ering authoritative, 
impartial information around access to ÿnance for 
ÿrms with scale-up ambitions. This is due to launch 
in Spring 2018. 
SMALL BUSINESS FINANCE MARKETS 2017/18 
RECORD LOW DEMAND FOR TRADITIONAL BANK 
LOANS IN 2017 
Data on loan application rates has showed a 
continuing decline in the share of SMEs seeking 
new loans to 1.7% of smaller businesses, the lowest 
ÿgure since the SME Finance Monitor began in 2011. 
In addition, there has been a decline in SMEs 
conÿdence that they will get a loan when they 
apply, down to 43% in the 3 months to November 
2017, compared to 58% in the previous 3 months 
which mirrors the broad decline in smaller business 
conÿdence levels. This contrasts with loan approval 
rates which remain quite high. 
There is also evidence that the attitudes against 
borrowing are becoming more entrenched across 
SMEs of all size bands, with around 70% willing to 
accept a slower growth rate rather than borrowing to 
grow faster. Combined with the increase in positive 
cash balances held by SMEs, this suggests a broader 
reticence to invest to grow. 
This highlights that, particularly for smaller 
businesses with growth potential, there would be 
beneÿt in improving the information available to 
them about their ÿnance options. 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9 
SMALL BUSINESS FINANCE MARKETS 2017/18 
8 
BRITISH BUSINESS BANK 
• Examples, which were published in our 2017 
Equity Tracker, include detailed analysis of 
venture capital fundraising and portfolio 
company exits 
• The British Business Bank and UK Business 
Angel Association commissioned a new survey 
of Business angel investors to give a more up to 
date understanding of the angel landscape in 
the UK 
• We draw on externally commissioned evaluations 
of British Business Bank products, most notably, 
our recent evaluation of the Enterprise 
Finance Guarantee. 
This report also references a wide range of evidence 
drawn from government, market and academic 
research. This year we made greater e¤ort to pull 
together the international evidence in the report, 
so that UK small business ÿnance markets are 
compared to the best around the world. 
STRUCTURE OF THE REPORT 
The report begins with an overall assessment of 
the aggregate ows of ÿnance, macro-economic 
developments and the implications for small 
business ÿnance needs. 
Part A provides a thematic overview looking in 
turn at the drivers of demand, regional ÿnance 
variations, the evidence on patient capital and 
international comparisons of small business 
ÿnance markets. 
Part B examines in more detail developments in the 
small business and high growth ÿrm populations. 
It then considers the market for di¤erent types 
of debt and equity ÿnance most widely used by 
smaller businesses, identifying where further 
improvements can be made. 
This is the fourth annual British Business Bank 
report on Small Business Finance Markets, 
setting out the latest evidence on the ways 
in which ÿnance markets support smaller 
business and help them contribute to improving 
productivity and growth in the UK economy. 
Our understanding of smaller business ÿnance 
markets, both in terms of demand for ÿnance and 
the ÿnance providers’ supply of ÿnance, is essential 
to shaping our business plan and the design of 
our programmes and products. Macro-economic 
developments in 2017 have reinforced the need to 
ensure that small business have the ÿnance they need 
to make a strong contribution to economic growth. 
NEW EVIDENCE AND ANALYSIS 
During 2017, the British Business Bank has 
developed new evidence and analysis to deepen 
our understanding of smaller business ÿnance 
markets. In particular: 
• Our Small Business Finance Survey has been 
run again to give up to date insight into smaller 
businesses, awareness of the ÿnance options 
available to them and how they go about 
obtaining ÿnance 
• We created a framework to give a better 
understanding of the potential impact of 
diversity in the supply of ÿnance for small 
businesses1 
• A new segmentation analysis has been created 
to give more insight into smaller businesses who 
use, or are open to using, external ÿnance 
• We carried out more detailed analysis of the 
UK equity markets to inform the Patient 
Capital Review 
INTRODUCTION 
AGGREGATE FLOW AND STOCK OF FINANCE 
TO SMALLER BUSINESSES 
• Net œow of bank lending products remained positive 
This section brings together the latest data from a range 
in 2017 but weaker than the previous 2 years 
of sources on the volume and value of various types 
of external ÿnance provided to smaller businesses. 
Consistent and comprehensive data outlining the value 
• Equity ÿnance rebounded in 2017, whilst asset ÿnance 
of the aggregate stocks and ows of all forms of external 
and marketplace lending continue to grow, increasing 
ÿnance is not readily available. However, the summary 
the diversity in smaller business ÿnance markets 
table below provides a reasonable snapshot. 
While ows of di¤erent types of ÿnance are not directly 
• Small business conÿdence and demand for ÿnance 
comparable, the data shows that bank lending remains 
are declining along with the number of smaller 
the single largest form of external ÿnance for smaller 
businesses hoping to grow 
businesses. 
FIGURE 1 
ESTIMATES OF THE FLOW & STOCK OF EXTERNAL FINANCE FOR UK SMEs ¯£ BILLION° ¯a° 
2012 
2013 
2014 
2015 
2016 2017 
Bank lending stock 
Source: Bank of England 
Outstanding Amount (b) 
176 
166 
167 
164 
166 
165 
to end Dec 17 
Bank lending œows 
Source: Bank of England 
Net ows (c) 
Gross ows (d) 
-6 
38 
-2 
43 
-2 
53 
2 
58 
3 
59 
1 
57 
to end Dec 17 
to end Dec 17 
Other gross ows of SME ÿnance 
Private external equity investments 
Source Beauhurst (e) 
1.49 
1.53 
2.31 
3.58 
3.42 
4.47 
to end Sep 17 
Number of reported deals 
706 
972 
1309 
1408 
1148 984 
to end Sep 17 
Asset ÿnance œows 
Source: FLA (f) 
12.2 
12.9 
14.4 
15.9 
16.7 
18.6 
to end Dec 17 
Peer-to-peer business lending œows 
Source: AltFi Data (g) 
0.06 
0.20 
0.41 
0.73 
1.18 
1.78 
to end Dec 17 
(a) The information contained in this table should be viewed as indicative 
as data and deÿnitions are not directly comparable across di¤erent 
sources. There can be some double counting across estimates in 
di¤erent parts of the table. Flows data are cumulative totals for the 
year or to the date stated. Non-seasonally adjusted. All numbers are 
in billions, except number of reported equity deals, and have been 
rounded appropriately. 
(b) Movements in amounts outstanding can reect breaks in data series 
as well as underlying ows. 
(c) Net ows does not always reconcile with change in stock due to 
di¤erences in statistical reporting. The reported stock can include 
other adjustments made by banks but not detailed when reported, 
whereas ows data does not include these adjustments. 
(d ) Data exclude overdrafts and covers loans in both sterling and foreign 
currency, expressed in sterling. The total may not equal the sum of its 
components due to rounding. 
(e) Beauhurst is a market data provider that records visible equity deals 
including crowdfunding deals. 
(f) The Finance & Leasing Association (FLA) whose members make 
up 90-95% of the market. Data obtained from FLA Asset Finance 
Conÿdence Survey. SME asset ÿnance is assumed to represent 60% 
of total asset ÿnance in 2011. 
(g) Figures do not represent the entire market. Data obtained from 
AltFi Data. 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
  
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 BRITISH BUSINESS BANK 
NET FLOW OF BANK LENDING PRODUCTS 
REMAINS POSITIVE 
The annual net ows of bank loans (new loans, 
excluding overdrafts) to smaller businesses has 
continued to grow, albeit at a slower pace. However, 
following 12 consecutive quarters of positive net 
lending, Q4 in 2017 was slightly negative. In 2017 
net lending stood at £0.7bn, well down on the £3bn 
for the equivalent period in 2016. Quarterly gross 
bank lending to smaller businesses, which reached 
a peak of £15.4bn in the ÿrst quarter of 2016, 
averaged £14.3bn in 2017. The Bank of England 
(BoE) Credit Conditions Review noted the availability 
of credit to businesses was little changed in 2017.2 
The stock of bank loans and overdrafts was 
estimated at £165bn at the end of 2017, broadly 
unchanged from 2016. 
EQUITY FINANCE HAS BOUNCED BACK FROM A 
WEAKER 2016 WHILST ASSET FINANCE, INVOICE 
& ASSET¬BASED LENDING AND MARKETPLACE 
LENDING CONTINUE TO GROW 
Equity data shows there has been a resurgence in 
equity markets in 2017 following a weaker 2016. 
The value of new equity deals with known amounts 
has reached £4.5bn in 2017 by Q3, up from the 
£3.4bn ÿgure for the entire of 2016. 
Data from the Finance and Leasing Association 
suggests that new asset ÿnance volumes with 
smaller businesses was over £18.6bn by the end 
of 2017, an increase of 12% on 2016. 
Total invoice & asset-based lending advances to 
smaller businesses continue to rise and across all 
sizes of smaller businesses. The value and volume 
of ÿnancing for smaller businesses from debt funds 
is not readily available. However, anecdotal evidence 
suggests debt funds continue to have an important 
role as a source of ÿnance for smaller businesses, 
especially for businesses that are scaling-up. 
Gross ows of lending to businesses via peer-to-peer 
platforms continue to grow reaching £1.78bn in 2017, 
an increase of 51%. Equity raised by businesses 
through equity-based crowdfunding continues to 
fall but remains an important source of business 
ÿnance and, along with the other non-bank sources 
of ÿnance, an important source of diversity within 
smaller business ÿnance markets. Part B provides 
a detailed discussion of the trends in volumes for 
di¤erent types of ÿnance. 
SMALL BUSINESS CONFIDENCE AND DEMAND 
FOR FINANCE ARE DECLINING, WITH THE 
NUMBER OF SMALLER BUSINESSES HOPING 
TO GROW DECREASING 
Demand for external ÿnance by UK smaller businesses 
has continued to decline. Our analysis of the SME 
Finance Monitor shows new debt application rates 
have fallen every year since 2012 (4% for overdrafts 
and 2.9% for bank loans) and H1 2017 has continued 
this trend with only 1.7% of smaller businesses 
applying, a record low.3,4 This has been matched by 
a build-up of cash reserves over the same period. In 
Q2 2017, 26% of SMEs reported holding more than 
£10,000 in credit balances, an increase from 16% in 
2012 and 21% the same time last year. 
The Federation of Small Business (FSB) Voice 
of Small Business reported decreasing business 
conÿdence over 2017, with conÿdence declining 
in each quarter.5 The FSB Small Business Index 
fell from +1.1 in Q3 2017 to -2.5 in Q4. This is only 
the second negative index reading in 5 years with 
continuing cost pressures and wider economic 
SMALL BUSINESS FINANCE MARKETS 2017/18 11 
uncertainty the key drivers. The share of businesses 
expecting to downsize, close or hand on the business 
over the coming 12 months stood at 14.6% in Q4. 
This is up from 9.4% a year ago, and the largest 
share since data collection began in 2012. The ICAEW 
conÿdence index has also been lower during 2017 
and has been in negative territory for the last 2 
quarters of the year. 
The domestic economy remained a major barrier 
to growth aspirations in Q4 2017, with 55% of 
small businesses reporting it as an obstacle to 
achieving growth aspirations. This is slightly down 
from 56.7% a year ago. The British Business Bank 
Business Finance Survey for 2017 shows a small 
decrease in the proportion of smaller businesses 
expecting to grow in the next 12 months, from 37% 
of SMEs in 2016 to 35% of SMEs this year. Both 
these numbers are well below the 2015 number 
of 56%. This is lower than the FSB Voice of Small 
Business where just under half of small businesses 
reported an aspiration to grow over the next year in 
Q4 2017. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
  
  
 
 
 
12 BRITISH BUSINESS BANK 
MACRO-ECONOMIC DEVELOPMENTS 
• The UK economy has continued to grow over 2017, 
albeit at a slower pace than other advanced economies 
• Productivity and business investment growth both 
revised down 
• SME Conÿdence surveys suggest the picture is 
unlikely to change in the medium-term 
• A majority of SMEs expect no impact from leaving 
the EU though fewer than last year think they’ll 
grow more 
• Credit conditions have remained accommodative 
overall 
THE UK ECONOMY HAS CONTINUED TO GROW OVER 
2017, ALBEIT AT A SLOWER PACE THAN OTHER 
ADVANCED ECONOMIES 
The UK economy has continued to grow over 2017 
whilst employment rates have remained high and 
unemployment is at its lowest rate since the 1970s. 
In 2017, the ONS estimated the economy expanded by 
about 1.8% compared with the previous year, higher than 
the OBR’s Autumn forecast of 1.5%, but down from a rate 
of 1.9% in 2016, and the slowest pace of annual growth 
since 2012. The slowdown in UK GDP growth contrasts 
with a pick-up in other advanced economies. In the euro 
area, US, Canada and Japan, quarterly growth has been 
stronger than in the second half of 2016 and stronger 
than in the UK. Sterling’s fall has seen ination pick up 
more rapidly in the UK than in the other major economies, 
contributing to weaker real growth. 
The fall in the pound that followed the EU referendum 
has pushed up consumer price ination and squeezed 
households’ real incomes and spending whilst public 
spending cuts and political and Brexit-related uncertainties 
have also weighed on the economy. The OBR has now 
downgraded its growth forecasts for the medium-term, 
saying the UK economy would grow by just 1.4% in 2018, 
1.3% in 2019 and 2020, and 1.5% in 2021. The growth 
ÿgure is now in line with the Bank of England’s assessment. 
Bank Rate increased by 0.25% in November 2017 to 0.5%, 
the ÿrst increase in a decade. Interest rates are expected 
to rise slowly. 
PRODUCTIVITY AND BUSINESS INVESTMENT GROWTH 
BOTH REVISED DOWN 
Leading much of the downward revision is potential 
productivity growth. The OBR now expects productivity 
growth to fall from 1.8% to 1% in 2020. Productivity has 
stalled since the ÿnancial crisis in 2008, with output per 
hour rising just 0.2% a year in the last decade, compared 
to an average of 2.1% a year over the preceding 35 years. 
This decision to revise down trend or potential productivity 
growth is a major reason the OBR’s growth forecast is 
now more pessimistic than many external forecasters. 
Growth is still expected in business investment, a crucial 
driver of long-term growth. The OBR now expects business 
investment to remain stable between 2.3% and 2.4% 
between 2018 and 2022. However, conÿdence surveys 
suggest that the anticipation of Brexit and related 
uncertainties are weighing on investment. For instance, 
in a recent survey on investment intentions by the Bank 
of England’s Agents, economic uncertainty, expected 
changes to future UK trading arrangements and other 
Brexit factors were the most commonly cited factors 
weighing on investment plans. 
SME CONFIDENCE SURVEYS SUGGEST THE PICTURE IS 
UNLIKELY TO CHANGE IN THE MEDIUM¬TERM 
During 2017, most SME conÿdence surveys were down. 
The Markit UK Business Outlook recorded its lowest 
business conÿdence since October 2011 during the 
summer and several other surveys recorded multi-year 
lows. Alongside political uncertainty, businesses faced 
the twin pressures of a weakening domestic economy, 
as well as rising costs of doing business. The former was 
driven by low consumer demand whilst, with regards the 
latter, purchase price ination hit record highs at the start 
of the 2017 as the devaluation of Sterling fed through. 
Headline ÿgures did hide a divergence between the 
manufacturing and service sectors however. Whilst the 
service sector posted multi-year low conÿdence ÿgures 
manufacturing ÿrms often remained more upbeat about 
their growth prospects as they sought to take advantage 
of the devaluation of Sterling and the improving world 
economic picture and surveys such as the Federation 
of Small Business (FSB) Voice of Small Business Index 
reported increased values of exports throughout the 
year. This is backed up by ołcial ÿgures which show 
manufacturing output is at its highest level since 
February 2008. 
SMALL BUSINESS FINANCE MARKETS 2017/18 13 
A MAJORITY OF SMEs EXPECT NO IMPACT FROM LEAVING 
THE EU THOUGH FEWER THAN LAST YEAR THINK 
THEY’LL GROW MORE 
As with the results from 2016, according to our 2017 
Business Finance Survey, the majority of SMEs expect no 
impact from leaving the EU. This is perhaps unsurprising 
given the limited number of UK SMEs that import or 
export. However, the number of SMEs who expect to 
grow as a result of the UK leaving the EU has halved this 
year and now stands at 5% across those that do, and do 
not, employ sta¤. 
Unsurprisingly given these ÿndings, on balance, a greater 
proportion of employers are looking to reduce investment 
and sta¤ as a result of the UK leaving the EU. In a similar 
picture to 2016, only 4% of respondents plan to make 
changes to their investment plans and 3% plan to make 
changes to their recruitment plans as a result of Brexit. 
Of these, 54% said they were looking to invest a smaller 
amount and 51% expected to hire fewer sta¤ than would 
have otherwise have been the case. In contrast only 19% 
expected to invest a greater amount and 10% expected 
to hire more sta¤ than would have been the case. 
DESPITE THE MODEST ECONOMIC PERFORMANCE 
IN 2017 CREDIT CONDITIONS HAVE REMAINED 
ACCOMMODATIVE OVERALL 
Throughout 2017, availability of credit to the corporate 
sector was reported to have been unchanged and broadly 
accommodative. However, unlike FSB’s survey, which 
noted improved credit conditions, a Bank of England 
Credit Conditions Survey and Agents Report stated some 
smaller companies reported greater diłculty in gaining 
access to banks’ relationship managers in recent months. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
PART A 
THEMES 
14 BRITISH BUSINESS BANK 
1.1 
DEMAND FOR FINANCE 
• Information failures exist on the demand side 
• SMEs prefer to avoid external ÿnance… 
1.1 
DEMAND FOR FINANCE 
1.2 
REGIONAL ACCESS TO FINANCE 
1.3 
PATIENT CAPITAL FOR SCALE-UPS 
1.4 
INTERNATIONAL COMPARISONS OF 
SMALL BUSINESS FINANCE MARKETS 
• …and SMEs prefer to self-fund their growth where 
possible 
• Changing the narrative on control may be required to 
a©ect change 
BRITISH BUSINESS BANK ANALYSIS ACKNOWLEDGES IT 
IS IMPORTANT TO CONSIDER THAT: 
• SMEs are heterogeneous, with di©erent ambitions 
and aspirations to grow 
• SMEs who use ÿnance, or are open to using ÿnance, 
fall into 4 distinct segments 
• SME segmentation insights enable policy responses 
to be targeted and more e©ective 
SMALL BUSINESS FINANCE MARKETS 2017/18 15 
FACTORS LIMITING DEMAND 
Smaller businesses are a vital part of the UK economy and 
a dynamic, growing SME sector is an essential element of 
future economic growth. SMEs play a key role in raising 
low productivity in the UK by spurring innovation, 
adopting new practices and encouraging ‘productive 
churn’ through competition. 
The ability of SMEs to access ÿnance is critical for funding 
business investment which in turn allows businesses 
to start-up and achieve their full growth potential. An 
inełcient market in SME ÿnance with fewer businesses 
getting the right ÿnance can constrain business 
development and reduce business survival rates. 
Lower than expected volumes of SME ÿnance transactions 
in the UK can reect market failures in the supply-side, 
demand-side, or both sides of small business ÿnance 
markets. As the supply of SME ÿnance has improved 
following the global ÿnancial crisis, the British Business 
Bank has turned its attention to examining in greater 
detail demand-related market conditions in UK SME 
ÿnance, and considering the best policy interventions 
to address these. 
Demand in the UK for SME ÿnance, in the form of new debt 
applications for bank loans and overdrafts, has been falling 
in the 5 years since 2012. For example, the percent age of 
SMEs applying for a new loan has fallen from 2.9% in 2012 
to only 1.7% in H1 2017.6  There is evidence that this decline 
is the result of on-going demand-side market failures. 
INFORMATION FAILURES EXIST ON THE DEMAND SIDE 
There are information market failures which a¤ect the 
demand for SME ÿnance. For example, if key business 
decision makers hold imperfect or inaccurate information 
on the types, costs, beneÿts, and their likelihood of 
securing external ÿnance, then demand may be suppressed. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
  
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
16 BRITISH BUSINESS BANK 
FIG A.1 
AWARENESS OF PRODUCTS AND SPECIFIC PROVIDERS 
Source: British Business Bank 2017 Business Finance Survey - Ipsos MORI 
Base = all SMEs (n=2,070 in 2017) 
Credit cards 
Leasing/Hire purchase 
Government/LA grants 
Invoice ÿnance/ 
factoring 
Crowd funding 
Trade ÿnance 
Venture capital 
P2P lending 
Business angels 
Mezzanine ÿnance 
0 
20 
40 
60 
80 
100 
Per cent 
Awareness of providers 
Awareness of ÿnance type 
FIG A.2 
AWARENESS OF TYPES OF FINANCE BY REGION 
Source: British Business Bank 2017 Business Finance Survey – Ipsos MORI 
Base = all SMEs (n=2,070 in 2017) 
0 
10 20 30 40 50 60 70 80 90 100 
Credit cards 
Leasing/Hire purchase 
Government/LA grants 
Invoice ÿnance/ 
factoring 
Crowdfunding 
Trade ÿnance 
Venture Capital 
P2P lending 
Business angels 
Mezzanine ÿnance 
Per cent 
North 
Midlands 
South (excl. London) 
London 
Anecdotal evidence suggests that some UK entrepreneurs 
do not fully consider the di¤erent options available to 
them to support their long-term growth. This reduces the 
ełciency by which capital is allocated to growing ÿrms, 
meaning that high growth potential ÿrms sometimes 
struggle to obtain the right ÿnance that they need to 
grow to scale. 
This is corroborated by survey data which has consistently 
shown that most UK SMEs are not aware of ÿnancial 
products beyond standard term bank loans, overdrafts 
and credit cards. And, even where they are aware of a 
product, often they may not practically know a trusted 
provider of that product to contact (ÿgure A.1). 
Furthermore, there are regional variations to awareness. 
Awareness of alternative ÿnancial products is generally 
lower outside of London and the South East (ÿgure A.2). 
This may reect a lack of availability of such products, or 
could be one of the contributing factors for the lack of 
critical mass to support product availability, or both. 
Product (and provider) awareness is necessary for a 
functioning market, but not sułcient. An SME should also  
understand the costs and beneÿts of a ÿnancial product 
before being willing to use it. A survey carried out by the 
Wesleyan Bank suggests that SMEs often don’t have 
a good enough understanding of the ÿnancial options 
available to them to make sound borrowing decisions.7 
The 2016 Wesleyan Bank SME Attitudes to Finance survey 
highlights only 24% of SMEs would feel comfortable to 
borrow from an alternative ÿnance provider in comparison 
to 63% who would feel comfortable borrowing from a 
bank. Even then, only 45% and 37% stated that they 
had a full understanding of overdrafts and bank loans 
respectively. Furthermore, conÿdence amongst SMEs 
planning to apply for bank ÿnance has declined towards 
the end of 2017. In 2016, 55% of SMEs planning to apply 
for bank ÿnance were conÿdent of success, with conÿdence 
increasing in the latter half of the year. During 2017 
conÿdence has been more volatile, but declined to 43% 
in the 3 months ending November 2017.8 
Even amongst those SMEs who are conÿdent that they 
understand which ÿnancial product is best suited to 
their needs, there may be imperfect information around 
their self-assessed probability of successfully applying 
for that product. Surveys show that smaller business 
owners systematically view getting ÿnance as diłcult 
and over-estimate their probability of being rejected. 
Such perception gaps may not reect reality at present, 
with around 80% of bank loan and overdraft applications 
being approved (the rate for ÿrst time applications is lower, 
at around 50%).9  The 2016 British Business Bank Business 
Finance Survey highlighted 56% of SMEs reporting a 
perception that obtaining external ÿnance is ‘diłcult’. 
Data shows that a small but signiÿcant proportion of SMEs 
who say that they require ÿnance remain discouraged 
from applying for ÿnance because they believe they will 
be rejected. This translates into 1% of all SMEs.10 
Taking external advice when seeking external ÿnance, 
given the lack of awareness and understanding of the 
products available, would appear to be one solution to 
addressing these demand-side market failures. However, 
British Business Bank survey data shows that most SMEs 
do not seek advice when applying for ÿnance (ÿgure A.3). 
SMEs PREFER TO AVOID EXTERNAL FINANCE… 
Lack of awareness and understanding of ÿnancial 
products can also reect a more fundamental apathy 
and perceived absence of relevance to business owners. 
There is, after all, no reason for an entrepreneur to take 
the time to educate themselves on forms of ÿnance if 
they have no intention of ever requiring or applying for 
external ÿnance. Not least, doing so is time consuming 
and any ultimate ÿrst-time application is fraught with the 
real possibility of rejection. Also, there is a proportion of 
smaller businesses who have a perception that obtaining 
ÿnance takes a lot of e¤ort. In Q2 2017, 7% of future 
would-be seekers of ÿnance cited the hassle of borrowing 
as the reason for not planning to seek ÿnance, despite 
having a need to do so. 
Indeed, we ÿnd that a perceived lack of relevance is 
the case for a large portion of the UK SME population. 
For some business owners, this is driven by a general 
aversion to external ÿnance options even if that means 
sacriÿcing growth opportunities. For other business 
owners, this is driven by access to other more attractive 
ways of funding their growth plans. 
There is signiÿcant reported aversion to external ÿnance 
amongst UK SMEs. 42% of surveyed UK SMEs do not 
currently use ÿnance and are unwilling to do so (ÿgure 
A.4). This aversion is concentrated amongst SMEs with 
no employees, but even amongst SMEs with 50 to 249 
employees, 21% neither use nor express a desire to use 
external ÿnance in the future. 
For many UK SMEs, their ultimate aspiration is to be debt 
free. In 2016, 68% of smaller businesses agreed that “their 
aim was to pay down debt and remain free if possible”.11 
SMALL BUSINESS FINANCE MARKETS 2017/18 17 
FIG A.3 
WHAT WAS THE FIRST THING YOU DID WHEN YOU REALISED 
YOU HAD A FINANCING NEED? 
Source: British Business Bank 2017 Business Finance Survey – Ipsos MORI 
Base = all SMEs that sought ÿnance in the last 3 years (n=932) 
Went directly to main bank 
Spoke to supplier/dealer/manufacturer 
Researched ÿnance types and products on internet 
Used a credit card/overdraft/existing facilities 
Went to ÿnance provider other than bank 
Sought advice from  other businesses/friends 
Spoke to ÿnance adviser 
Spoke to board/directors/seniors 
Spoke to accountant 
Looked into ÿnance options 
Examined expenses/cash ow/company accounts 
Looked into ÿnancing myself internally 
Went directly to another bank 
0 
5 10 15 20 25 30 35 40 
Per cent 
FIG A.4 
USE OF EXTERNAL FINANCE AND WILLINGNESS 
TO USE IN THE FUTURE 
Source: BDRC Continental, SME Finance Monitor Q2 2017 
Total 
0 
1-9 
10-49 50-249 
emps emps 
emps 
emps 
Use external ÿnance 
and willing to use 
in future 
19% 
16% 
27% 
35% 
39% 
Use external ÿnance 
but not willing to use 
in future 
20% 
19% 
21% 
26% 
28% 
Do not use it 
but willing to 
19% 
19% 
19% 
15% 
13% 
Do not use it 
and not willing to 
42% 45% 
34% 
26% 
21% 
 
  
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
18 BRITISH BUSINESS BANK 
FIG A.5 
PROPORTION OF SMEs HAPPY TO USE EXTERNAL 
FINANCE FOR GROWTH AND DEVELOPMENT 
Source: BDRC Continental, SME Finance Monitor Q2 2017 
Total 
0 
1-9 
10-49 50-249 
emps 
emps 
emps 
emps 
Strongly agree 
7% 
6% 
9% 
10% 
13% 
Agree 
31% 
29% 
36% 
40% 
39% 
Neither/nor 
23% 
23% 
22% 
25% 
29% 
Disagree 
28% 
29% 
24% 
20% 
15% 
Strongly disagree 
11% 
12% 
9% 
6% 
3% 
Total “Agree” 
38% 
35% 
46% 
49% 
52% 
FIG A.6 
CREDIT BALANCES HELD OVER TIME FOR ALL SMEs 
Source: BDRC Continental, SME Finance Monitor Q2 2017 
2012 2013 2014 2015 2016 H1 2017 
None 
4% 
4% 
5% 
3% 
3% 
4% 
Less than 
£5,000 
66% 64% 58% 55% 57% 
52% 
£5,000 to 
£10,000 
14% 
15% 
17% 
18% 
18% 
19% 
£10,000 to 
£50,000 
11% 
12% 
14% 
17% 
15% 
18% 
More than 
£50,000 
5% 
4% 
6% 
7% 
6% 
8% 
Average 
balance held 
£25k £24k £31k £39k £30k 
£40k 
That said, ÿnance aversion amongst UK SMEs does not 
dominate in actual practice with many SMEs who express 
a desire to avoid ÿnance still using it. 40% of small 
businesses currently used some form of external ÿnance 
in Q2 2017, increasing by size of SME. 76% of medium 
sized businesses (50-249 employees) made use of it in 
comparison to 52% of micro businesses (1-9 employees).12 
Fundamentally, ÿnance is a means to enable growth 
plans (through for example purchasing assets) or to 
bridge cash ow shortfalls. Overall, 66% of SMEs who 
applied for external ÿnance over the last 3 years did so to 
acquire working capital or cash ow, and 41% applied to 
invest in their business. Medium-sized SMEs (50 to 249 
employees) were more likely to apply for external ÿnance 
for investment purposes than small (10 to 49 employees) 
and micro businesses (1 to 9 employees) and were less 
likely to need ÿnance for working capital.13 
…AND SMEs PREFER TO SELF¬FUND THEIR GROWTH 
WHERE POSSIBLE 
Only 38% of UK SMEs agree with the statement “as a 
business we are happy to use external ÿnance to help the 
business grow and develop” (ÿgure A.5).14  This suggests 
that the remaining 62% of businesses will turn to other 
alternatives ÿrst, in line with pecking order theory, and 
fund growth internally before using external debt and then 
external equity (see section 2.3, Use of external ÿnance). 
Almost all SMEs hold some credit balances, but the number 
holding larger credit balances has increased over time. 
This has enabled more business owners to self-fund, 
in line with their preferences. 
SMEs holding balances of £10,000 or more increased 
from 16% to 26% between 2012 and H1 2017 (ÿgure 
A.6). This increase in credit balances is also reected in 
the average balance held by SMEs which increased from 
£25,000 to £39,000 between 2012 and 2015. In 2016, 
it was lower at £30,000 but then increased again to 
£40,000 during H1 2017. SMEs of all sizes have seen an 
increase in credit balances of £10,000 and above during 
this period. Generally, the larger the SME the more likely 
it is to hold such sums. 
As one might expect, the SME Finance Monitor revealed 
that holding credit balances of £10,000 and above from 
Q3 2015 reduced the need for 8 in 10 SMEs to use external 
ÿnance. Furthermore, 81% of smaller businesses in Q2 
2017 agreed that “our current plans for the business are 
based entirely on what we can a¤ord to fund ourselves”. 
However, we might also expect that given a choice between 
tapping external ÿnancing to achieve proÿtable growth 
and forgoing growth by avoiding external ÿnancing, 
then business owners would choose ÿnance. This is not 
necessarily the case. 70% of SMEs report that they are 
prepared to accept slower growth if it could then be self-
funded. This holds less true for medium sized businesses 
(50-249 employees) where only 55% were willing to 
accept slower growth (ÿgure A.7). 
CHANGING THE NARRATIVE ON CONTROL MAY BE 
REQUIRED TO AFFECT CHANGE 
The evidence, whilst not conclusive, suggests that there 
is a demand-driven gap between optimum levels of 
investment in a fully functioning market and the levels 
found today. Root causes for this gap can be found in the 
preferences and practices of UK business owners. 
Fear of external ownership is real in the case of external 
equity: 55% of SMEs state that they would be worried about 
loss of control and 45% did not want to give a share away.15 
Other academic research shows that founders of ÿrms 
appear to be more motivated over the long-term by the 
autonomy of being an entrepreneur and being in control of 
their ÿrm rather than through ÿnancial incentives.16  Although 
debt poses less obvious risk of loss of control, it can still 
be viewed as reducing the autonomy of a business owner. 
An alternative way of viewing the trade-o¤ between 
business owner control and the pursuit of growth 
opportunities may be required to address these demand-
side market failures. Entrepreneurs must be convinced 
that it is preferable to own a smaller share of a larger, 
more valuable entity with the additional ÿnance, support 
and expertise this could provide, than it is to remain in 
sole control of a smaller, less valuable business. 
SMALL BUSINESS FINANCE MARKETS 2017/18 19 
FIG A.7 
WILL ACCEPT A SLOWER GROWTH RATE RATHER 
THAN BORROWING TO GROW FASTER 
Source: BDRC Continental SME Finance Monitor, Q2 2017 
50-249 
employees 
10-49 
employees 
1-9 
employees 
0 
employees 
All 
0 
10 
20 
30 
40 
50 
60 
70 
80 
90 100 
Per cent 
Strongly agree 
Agree 
Neither 
Disagree 
Strongly disagree 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
  
 
  
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
20 BRITISH BUSINESS BANK 
SME ATTITUDINAL AND NEEDS 
BASED SEGMENTATION 
SMEs ARE HETEROGENEOUS, WITH DIFFERENT 
AMBITIONS AND ASPIRATIONS TO GROW 
SMEs WHO USE FINANCE, OR ARE OPEN TO USING 
FINANCE, FALL INTO 4 DISTINCT SEGMENTS 
The British Business Bank worked with existing survey 
data of UK SMEs and commissioned a cluster-based 
analytical segmentation of the population based on SME 
attitudes and needs towards ÿnance (see Use of external 
‘CONTENTED’ 
The largest of the 4 segments, the ‘Contented’ make up 32% 
of SMEs and are broadly unworried and undemanding 
(ÿgure A.9). They self-report being ÿnancially conÿdent 
but objectively have lower levels of ÿnancial qualiÿcation 
and lower rates of awareness/understanding of ÿnancial 
SMALL BUSINESS FINANCE MARKETS 2017/18 21 
FIG A.9 
BRITISH BUSINESS BANK SME SEGMENTS, 
PERCENTAGE OF BUSINESSES 
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset 
ending Q2 2017 
Quicksilvers 
Permanent non-borrowers 
Contented 
9 
Fighters 
47 
32 
7 
Savvy 
Entrepreneurs 
6 
ÿnance section 2.3 for more detail on our technical 
approach). Notably, this segmentation did not consider 
need for any single type of ÿnance, but rather overall 
need for and use of di¤erent types of ÿnance and non-
ÿnance support. It also overlaid an SME’s openness to 
external information about ÿnance and how to secure it. 
This attitudinally based approach suggests that UK 
SMEs can be usefully divided into 4 distinct groups 
that currently use external ÿnance or are open towards 
using ÿnance, in addition to a large group which neither 
currently uses nor intends to use any form of ÿnance. 
products. Relative to other groups, the Contented are 
least likely to be innovative and internationally oriented 
businesses and have substantially lower growth ambitions. 
Contented have the lowest proportion of SMEs (16%) 
that have plans to grow by more than 20% over the next 
year (ÿgure A.10). Notably, this group is also among the 
least happy to use external ÿnance to grow and is least 
interested in new external information (ÿgure A.11). This 
may reect the reduced relevance of ÿnance given low 
growth ambitions. 
‘QUICKSILVERS’ 
It is at this point where speaking of smaller business owners 
as a single entity becomes less useful for generating 
insights. What may be true is not to speak of average 
ambition levels found across a heterogenous population 
of 5.7m smaller businesses in the UK, but rather the 
percentage of that population which does have high 
ambition and a growth mindset. 
The British Business Bank has undertaken SME 
segmentation analysis so that interventions can be 
targeted to the highest potential and most receptive 
sub-group. Further details about the results of this 
This latter group of ‘Permanent non-borrowers’ 
(PNB) is very large and makes up approximately half 
(47%) of all UK smaller business owners. In general, 
a disproportionate percentage of these companies are 
small, with no employees. They are also less likely to 
expect to grow or be international or innovative. For 
the purposes of our segmentation, this group has been 
excluded; however, it has not been established yet how 
durable PNB intention not to use external ÿnance is, and 
whether some proportion of this group shifts each year 
within their group in terms of needs and attitudes towards 
ÿnance which make them distinct from the other groups 
on average (ÿgure A.8). 
The segment most likely to have high growth ambitions are 
‘Quicksilvers’, which make up 9% of SMEs. Although not 
all Quicksilvers have achieved 20+% growth on average 
over 3 years, nearly all such companies have the growth 
mindsets consistent with the Quicksilver attitudinal 
segment. Quicksilvers have the largest proportion (37%) 
of smaller businesses planning to grow more than 20% 
over the next year and Quicksilvers (62%) are also most 
open towards use of external ÿnance to help growth. 
most ambitious growth plans, and could have the largest 
potential positive impact on UK economic and job growth. 
However, as they try to scale-up, many have issues with 
15 
ÿnance applications, experiencing rejection, and an inability 
to borrow and raise equity. These smaller business owners 
are relatively well informed about ÿnancial products but 
FIG A.10 
PLANS FOR BUSINESS TURNOVER OVER THE NEXT YEAR, 
BY SME SEGMENTATION 
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset 
ending Q2 2017 
50 
45 
40 
35 
30
Per cent 25 
20 
10 
5 
as their circumstances change. 
These are the fastest growing businesses, with the 
segmentation analysis, and its application to policy 
The 4 segments amongst UK smaller business owners 
can be found in this section. 
who use external ÿnance demonstrate commonalities 
FIG A.8 
SME MARKET SEGMENTATION, EXCLUDING PERMANENT NON¬BORROWERS 
Source: British Business Bank 
CONTENTED 
FIGHTERS 
Undemanding and unworried. The least likely to  
Trying to overcome obstacles and grow.  
be innovative and international, and with the  
Tend to be somewhat ambitious, international  
lowest growth ambitions. Relatively ÿnancially  
and innovative. Most likely to report obstacles to  
conÿdent, but not informed. 
running their businesses, including those relating  
to cashœow, skills, politics, the economy and  
access to ÿnance. 
SAVVY ENTREPRENEURS 
QUICKSILVERS 
in their own abilities, but also the highest levels of 
Innovative, international and formal. The most  
conÿdent in their own abilities to assess ÿnance  
options. Most likely to have a ÿnancial qualiÿcation. 
conÿdence that their banks would provide ÿnance if
Growing, successful, but somewhat vulnerable. The fastest-
applied to. Perhaps consequently, ‘Savvy Entrepreneurs’
growing businesses with the most ambitious growth plans. 
tend to be less open to external information and believe 
Relatively international and innovative. Somewhat conÿdent 
that they already know what they require. 
in their abilities to assess ÿnancial options and relatively 
more likely to employ someone with a ÿnancial qualiÿcation. 
Nevertheless, have had some issues with previous  
rejections by a bank. 
less so than Savvy Entrepreneurs. Quicksilvers, furthermore, 
are also more open to seeking out and absorbing external 
information that helps them which suggests an opportunity 
exists to target them with useful support. 
‘SAVVY ENTREPRENEURS’ 
In contrast, the ‘Savvy Entrepreneurs’ segment (which is 
6% of SMEs), are the most ÿnancially informed and most 
likely to have a ÿnancial qualiÿcation. These business 
owners either are or have run more than one business 
either in parallel or are serial entrepreneurs. These 
businesses tend to be more innovative, international and 
run with formal processes than average. Their experience 
and track records are valuable, visible, and veriÿable. 
This group not only self-reports the highest conÿdence 
0 
Contented 
Fighters 
Savvy 
Quicksilvers 
Entrepreneurs 
To grow more than 20% 
To grow but by less than 20% 
To stay the same 
FIG A.11 
ATTITUDES TOWARDS GROWING A BUSINESS 
AND USE OF EXTERNAL FINANCE 
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset 
ending Q2 2017 
80 
70 
60 
50 
Contented 
Fighters 
Savvy 
Quicksilvers 
Entrepreneurs 
Will accept slower growth rate rather than borrowing to grow faster 
Are happy to use external ÿnance to help grow and develop the business 
Per cent 40 
30 
20 
10 
0 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
22 BRITISH BUSINESS BANK 
SMALL BUSINESS FINANCE MARKETS 2017/18 23 
1.2 
REGIONAL ACCESS TO FINANCE 
FIG A.12 
SHARE OF SMEs LIKELY TO HAVE A NEED FOR MORE EXTERNAL 
FINANCE / APPLY FOR MORE FINANCE IN THE NEXT 3 MONTHS 
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset 
ending Q2 2017 
35 
30 
25 
‘FIGHTERS’ 
Not all segments show such conÿdence. 7% are ‘Fighters’ 
and they are deÿned heavily by their perception of facing 
many obstacles. These include managing cashow, 
customer late payment, skills, political shocks, economic 
headwinds, as well as access to ÿnance. Nevertheless, 
beyond their daily concerns, some of these businesses 
are still trying to achieve their ambitions, including 
through innovation and international activity. Fighters 
are the most likely to identify a need for external ÿnance 
(30%), or apply for more external ÿnance (25%) (ÿgure 
A.12). Clearly, not all Fighters will succeed in overcoming 
their immediate issues but as a group they are also very 
open to external information and practical support. 
SME SEGMENTATION INSIGHTS ENABLE POLICY 
RESPONSES TO BE TARGETED AND MORE EFFECTIVE 
At this point in the UK economic cycle, we believe that 
the Quicksilver segment is the most attractive to target 
from an information provision policy perspective. This is 
because their attitudinal openness means they have the 
• Where a smaller business is based can be an 
important factor in their search for ÿnance 
• Bank lending is largely distributed in the UK in line 
with the overall business population in most areas 
• Equity deals are concentrated in London 
Where a smaller business is based can sometimes have a 
signiÿcant impact on their ability to ÿnd the ÿnance they 
need. The Beneÿts of Diverse Smaller Business Finance 
Markets publication highlighted place as one of the key 
issues to consider when thinking about diversity from 
both a demand and supply perspective.18 This section 
brings together the latest data from a range of sources 
on the volume and value of various types of external 
ÿnance provided to smaller businesses in di¤erent areas 
highest potential to be inuenced by policy interventions. 
20 
and highlights recent bank analysis that helped inform 
• However, clusters of equity activity do exist 
Per cent a new programme to support developing clusters of 
Improving the level of awareness and understanding of 
throughout the country 
business angels outside of London. 
BANK LENDING IS LARGELY DISTRIBUTED IN THE UK 
the full range of ÿnancial products available to this group 
15 
is likely to also improve the ełciency of capital allocation 
• Business angel activity is also concentrated 
within the UK economy. 
10 
in London and displays di©erent investment 
IN LINE WITH THE OVERALL BUSINESS POPULATION 
characteristics to those located outside of London 
It is worth noting that Quicksilver companies are found 
IN MOST AREAS 
5 
0 
Contented 
Fighters 
Savvy 
Quicksilvers 
Total 
Entrepreneurs 
(excluding 
permanent 
non-borrowers) 
Very or fairly likely to have a need for more external ÿnance in the next 3 months 
Very or fairly likely to apply for more external ÿnance for the business in the 
next 3 months 
in all industries and regions of the UK, and amongst 
companies of all ages and sizes. This is consistent with 
the ÿndings of the ScaleUp Institute Review which found 
that scale-up companies that had achieved more than 
20% growth over 3 years are geographically spread 
across the UK.17 
Further work has been done to understand how to 
quickly and reliably identify which segment a company 
belongs to, technical details are discussed in section 2.3 
(Use of external ÿnance). 
BRITISH BUSINESS BANK DEMAND 
SIDE RESPONSE 
To tackle information failures which a¤ect demand for 
• Increasing the number of Business angels o©ers a 
potential solution to address regional di©erences 
in the availability of equity ÿnance 
FIG A.13 
SHARE OF VALUE AND VOLUME OF BANK LENDING AND 
BUSINESS POPULATION ACROSS GREAT BRITAIN 
Source: BEIS 2017 Business population estimates, UK Finance (year ending Q3 2017) 
and British Business Bank calculations 
25 
20 
Bank lending is an example of a product where the 
regional distribution of lending more closely matches the 
distribution of the business population. Of the 11 English 
regions and devolved administrations bank lending is 
close to or exceeds the share of the overall business 
population (ÿgure A.13).19 The 2 notable exceptions are 
London and the South East which have proportionately 
lower shares of bank lending in terms of the number 
of loan facilities approved compared to the share of 
businesses in the region. For London this also extends to 
the value of the loan facilities approved, with the South 
East having a slightly higher share of business population 
compared to share of loan value approved. 
The lower share of bank lending in London and the South 
15
Per cent SME ÿnance the British Business Bank is implementing 
a new targeted information strategy. This new ‘targeted 
East (compared to business population) does not imply 
these regions have proportionately less access to bank 
approach’ is intended to complement the Bank’s ongoing 
10 
lending. Two main factors are likely to drive this result, 
‘whole of market’ activities which provides ÿnance 
discussed below. 
information aimed at all smaller businesses. 
5 
A recent OECD report highlighted the challenges posed 
To deliver this new targeted information strategy we 
are developing a digital hub which will contain best in 
class content. We are initially focussed on the needs of 
when analysing regional data. Business population data 
can be susceptible to headquarter bias.20  This is due to the 
0 
misallocation of ÿgures to the region of the headquarters 
(rather than to the region of location of the economic 
activity). The report notes this is particularly the case for 
capital city regions. Using London as our example, it is likely 
the number of businesses reported as being in London 
signiÿcantly overstates the actual number of businesses 
carrying out their day-to-day business in London. 
London South EastSouth West East MidlandsWest Midlands East of England Yorkshire & the Humber North EastNorth West Wales Scotland potential and high growth SMEs. 
A targeted approach for information delivery will not 
sideline or replace the Bank’s existing work to provide 
information for the market as a whole. It represents a ÿrst 
step towards a more dynamic and intelligent framework 
for delivery of SME ÿnance information. We will learn from 
No. of loan 
Value of loan 
GB business 
facilities 
facilities 
population 
the early experience of the digital hub to continuously 
improve how ÿnance information is delivered to SMEs. 
approved 
approved 
2017 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24 BRITISH BUSINESS BANK 
FIG A.14 
SHARE OF EQUITY DEALS, INVESTMENT AND HIGH 
GROWTH FIRMS BY REGION AND DEVOLVED ADMINISTRATION 
Source: Beauhurst, ONS and British Business Bank calculations22 
70 
60 
50 
This is partly due to the increased number of software 
deals in recent years, which may have contributed to the 
increased concentration of deals in London over time. 
For instance, the number of software deals (by unweighted 
count) increased by 304% between 2011 and 2015 
compared to 144% for non-software. The report found 
61% of all software deals are in London, compared to 
43% of non-software deals. 
SMALL BUSINESS FINANCE MARKETS 2017/18 25 
Whilst the overall UK market, dominated by London, has 
developed over the last few years, in areas outside of the 
capital, demand and supply side factors are likely to interact 
leading to a ‘thin market’. Limited numbers of investors 
and entrepreneurial growth ÿrms have diłculty ÿnding 
and contracting with each other at reasonable costs. 
Thick markets are characterised by high levels of repeated 
interaction between VC and high-growth ÿrms, so that 
human capital is built up in the sector, with a large enough 
market for an ecosystem of supportive activities to develop. 
HOWEVER, CLUSTERS OF EQUITY DEAL ACTIVITY DO 
EXIST THROUGHOUT THE COUNTRY 
English regions and devolved administrations obscure 
A second reason is that businesses in London and the 
South East may have greater access to, and awareness 
of, alternative sources of ÿnance, such as equity, when 
compared to those in other regions so are less reliant on 
banks for ÿnance. 
The diverse spread of bank lending does not mean that all 
The distribution of non-software deals is more nuanced 
with London having a higher density of earlier stage 
and smaller deals (less than £1m), but growth stage 
deals in non-software sectors are slightly more spread 
out throughout the UK and are closer to the wider 
distribution of HGFs. For instance, London’s share of 
debt ÿnance products are utilised to a similar level across 
growth deals in non-software sectors is 28% which is 
40
Per cent the large variation in equity deal numbers that occur 
within these areas. Equity deals tend to be grouped in 
the UK. Marketplace lending platforms are accessible by 
more in line with the region’s share of HGFs. 
30 
both funding providers and borrowers online, so distance 
20 
The Equity Tracker report identiÿed speciÿc supply side 
geographic clusters where innovative companies, skilled 
should be less important. However, survey evidence 
10 
and demand side factors that have contributed to the 
labour and equity investors locate close together to 
suggests funders and borrowers on these platforms are 
0 
di¤erences in the availability and use of equity ÿnance 
minimise time and travel costs and share the beneÿts 
London South EastScotland East of England North West South West Wales Equity Deals (Q4 2016-Q3 2017) 
Yorkshire and Humberside West Midlands North EastNorthern Ireland East Midlandsconcentrated in London and the South East.21 
Furthermore, a diverse regional spread of bank lending 
across regions and devolved administrations. The 
from greater networking. 
following numbers are updated from those previously 
The British Business Bank 2017 Equity Tracker report 
does not imply that all smaller businesses across the UK 
published in the 2017 Equity Tracker report, reecting 
showed the top 25 Local Authority Districts by number of 
receive the appropriate level of debt ÿnance. The market 
the latest available data: 
deals in 2016. Whilst Boroughs in London formed nearly 
failures that underpin the British Business Bank’s debt 
interventions still apply. 
half of the top 25 areas, there are important equity hotspots 
SUPPLY SIDE 
outside of the capital. This includes the established equity 
• A lack of equity fund manager presence in areas 
eco-systems of Oxford and Cambridge, but also cities like 
outside of London could explain some of the lower 
Edinburgh, Manchester, Cardi¤, Bristol, Glasgow, Shełeld, 
Equity Investment (Q4 2016-Q3 2017) 
EQUITY DEALS ARE CONCENTRATED IN LONDON 
HGFs (2015) 
Equity is a key part of the funding mix for High Growth 
Firms (HGFs) so rather than comparing the usage of equity 
to the total business population it is better to look at the 
usage of equity compared to HGFs for regional comparisons. 
HGFs are located in all areas of the UK. Only a small 
proportion of HGFs are likely to be using equity ÿnance, 
but for some high growth potential ÿrms, equity ÿnance 
is the only funding source that can enable them to 
achieve their growth. It is therefore important that high 
growth potential ÿrms have access to equity ÿnance in 
order that they can reach their potential. 
Despite this wide dispersion of HGFs, equity investment 
continues to be geographically concentrated in London 
with 52% of total deals and 65% of investment value 
over the past 12 months occurring in the capital city. 
London’s share of equity investment by both number of 
deals is signiÿcantly overrepresented when compared to 
its share of HGFs (20%) (ÿgure A.14). 
The 2017 Equity Tracker report identiÿed regional 
disparities in equity ÿnance have worsened over time 
with London and the South East having increased their 
share of equity investment over recent years. In 2011, 
44% of the UK’s equity deals were completed in London 
and the South East, but by Q3 2017 this had risen to 63%. 
availability. This is especially the case as investors 
often prefer to invest locally to minimise their time 
and travel costs.23 British Business Bank analysis of 
PitchBook in January 2018 shows of the 626 active 
investors24 with VC listed as one of their investment 
strategies, 74% have their head o¢ce listed with 
a London address (461).25 There are 165 investors 
(including public sector backed fund managers) listed 
with a head o¢ce located outside of London. This 
may underestimate the presence of equity investors 
in areas outside of London as many large investors 
have regional o¢ces. 
DEMAND SIDE 
• Smaller business awareness of equity ÿnance from 
VCs and business angels is lower in areas outside of 
London compared to the capital. Lower awareness of 
equity funding options may lead to lower willingness 
to use equity ÿnance, even if supply was increased. 
The 2017 British Business Bank Finance survey 
shows 69% of SMEs in London are aware of VC as a 
source of external ÿnance compared to 58% in the 
North and 61% in the Midlands. 
Leeds and Birmingham. The continued development and 
expansion of these technology clusters around the UK is 
important, as they provide the focal point for increasing 
the amount of equity ÿnance throughout the whole UK. 
Tech City acknowledges that the “face-to-face networking 
that these [accelerators, a¤ordable co-working spaces and 
experienced mentors] enable is hugely important 
to the growth and success of digital businesses”.26 
Networks can also beneÿt equity investors, as greater 
deal syndication is found to increase the likelihood of 
successful exit outcomes, especially for geographic or 
sector speciÿc networks of investors.27 
BUSINESS ANGEL ACTIVITY IS ALSO CONCENTRATED 
IN LONDON AND DISPLAYS DIFFERENT INVESTMENT 
CHARACTERISTICS TO THOSE LOCATED OUTSIDE 
OF LONDON 
Business angels are High Net Worth Individuals that invest 
their own money in small growing businesses through 
an equity stake. Business angels are an important source 
of ÿnance for SMEs. Quantifying the number of deals 
involving business angels is diłcult as business angels 
are less likely to be driven to seek publicity on completing 
investments, and so are largely missing from investment 
numbers in data sources like Beauhurst. 
 
 
 
 
 
  
 
  
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
SMALL BUSINESS FINANCE MARKETS 2017/18 27
26 BRITISH BUSINESS BANK 
FIG A.15 
SHARE OF EIS AND SEIS DEALS, HIGH GROWTH FIRMS, NUMBER 
OF BUSINESS START¬UPS AND NUMBER OF HIGH NET WORTH 
INDIVIDUALS BY REGION AND DEVOLVED ADMINISTRATION 
Source: HMRC, ONS, Barclays and British Business Bank calculations 
50 
40 
Many business angels use Enterprise Investment Scheme 
(EIS) tax relief within their investments, which can provide 
an estimate for the total amount of business angel activity 
in the UK. The Angel Spotlight report produced by British 
Business Bank and UK Business Angel Association conÿrms 
that 87% of angels who invested in 2016 used EIS or SEIS. 
HMRC data shows that 3,470 companies raised a total 
• Di”erences in factors a”ecting investment decision: 
Investee companies’ management team’s skills and 
experience, the potential for growth and the expected 
ÿnancial returns are the main factors inœuencing the 
decision to invest for businesses angels wherever 
they are based. However, angels based outside of 
London are more likely to look for investments where 
Business angels provide non-pecuniary beneÿts through 
the expertise they share which can beneÿt their investee 
companies. Business angels often have direct sector 
or business experience which they share with their 
investment companies. This will have a positive impact 
on business growth in addition to the funding the 
company receives. 
of £1.9bn of funding in 2015-16 under the EIS scheme.28 
they can add their skills and experience (46% cited it 
30 
The 2017 Autumn Budget announced that the British 
An additional 2,360 companies also received investment 
as important compared to 25% in London). Location 
Business Bank will shortly launch a commercial investment 
20 
through the Seed Enterprise Investment Scheme (SEIS) 
of investments is a consideration for business angels 
programme to support developing clusters of business 
10 
in 2015-16 raising £180m of funding. This shows the 
outside of London (10%), whilst no angels in London 
angels outside of London. 
importance of angel funding to UK companies, which 
reported this as an important factor inœuencing their 
0 
Per cent exceeds the number of companies funded by VC funds. 
EIS and SEIS deals are highly concentrated in London and 
the South East with 46% and 17% of all deals located 
in these regions respectively in 2015/16. This is despite 
London accounting for only 26% of start-ups and 20% 
of HGFs (ÿgure A.15). 
decision to invest. 
INCREASING THE NUMBER OF BUSINESS ANGELS 
OFFERS A POTENTIAL SOLUTION TO ADDRESS 
REGIONAL DIFFERENCES IN THE AVAILABILITY 
OF EQUITY FINANCE 
This will add to the range of regionally focused activity 
in the British Business Bank’s portfolio. The role out 
of regional funds such the Northern Powerhouse 
Investment Fund and the Midlands Engine Investment 
Fund is continuing, enabling more businesses in those 
regions to access debt and equity ÿnance. The British 
Business Bank is also establishing the Cornwall & Isles of 
Scilly Investment Fund in partnership with the Cornwall & 
Isles of Scilly Local Enterprise Partnership. As announced 
in the government’s Industrial Strategy the British 
Business Bank will be rolling out a network of regional 
managers by autumn 2018 to ensure businesses across 
the UK know how to access sources of investment. 
London South EastEast of England South West North West West Midlands Scotland East MidlandsYorkshire & the Humber Wales North EastNorthern Ireland Number of EIS 
& SEIS deals 
(2015-16) 
Number of 
HGFs (2015) 
Number of 
business start-ups 
(2015) 
Number 
of HNW 
individuals 
The Angel Spotlight Survey also conÿrms a lack of angels 
located in areas outside of London and the South East. 
57% of business angels responding to the survey were 
located in London or the South East, with just 7% based 
in the Midlands and 7% in the North.29 
The survey also identiÿes interesting di¤erences between 
angels located in London and those located outside:30 
• Di”erences in experience: Business angels located 
outside of London are likely to be older and more 
experienced than angels located in London. The 
average time spent investing as an angel in London 
is 5.8 years (median 4 years) compared to 9 years 
(median 7 years) for angels located elsewhere. 
• Di”erences in involvement in investee companies: 
Angels in London are more likely to have a passive 
shareholder role (87%) compared to angels outside 
of London (63%), which reœects a lower proportion 
sitting on the board (30% compared to 58%). This 
may be due to London based business angels being 
more likely to use crowdfunding platforms to make 
investments (47% of angels in London have invested 
through a crowdfunding platform in 2016/17 
compared to 32% outside of London). 
Equity investors, especially those making smaller 
investments into smaller companies often prefer making 
investments in business that are geographically closer. 
This is because they can spend signiÿcant amount of time 
with their portfolio company getting to understand the 
business. Anecdotally, it is often reported that a two-hour 
travel time is often used as a guide for investing. Therefore, 
the supply of equity ÿnance is likely to be linked to the 
location of where equity investors are based. Encouraging 
higher levels of business angels o¤ers a potential mechanism 
for addressing regional imbalances in the availability of 
equity ÿnance. 
This is because business angels have the potential to be 
more geographically dispersed throughout the UK than 
other equity investors. Out of the estimated 625,000 total 
number of millionaires in the UK, ÿgure A.15 shows 74% 
are located outside of London.31 Not everyone will have the 
skills, experience or desire to become a business angel, 
but it does suggest the potential ow of individuals 
that could become business angels is more regionally 
dispersed than the current location of equity investors 
where 74% have a head ołce based in London. 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
   
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
  
  
 
 
 
  
 
 
 
  
 
  
  
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28 BRITISH BUSINESS BANK 
1.3 
PATIENT CAPITAL FOR SCALE-UPS 
• Patient capital is long-term investment in 
innovative ÿrms looking to scale up 
• Analysis conÿrms there is a shortage in the 
availability of patient capital to UK high growth 
potential ÿrms leading to fewer businesses 
scaling up 
• The British Business Bank will increase the amount 
of longer-term ÿnance available to innovative, 
high-growth smaller businesses through the 
package of support announced at Autumn Budget 
The Government has recently published its response to the 
Patient Capital Consultation.32 This section summarises 
the evidence on the availability of patient capital to 
high growth innovative ÿrms from the Patient Capital 
Consultation including contributions from the British 
Business Bank. The section will then explain how the 
British Business Bank will use the additional funding it 
received to increase the availability of patient capital to 
growing businesses. 
PATIENT CAPITAL IS LONG¬TERM INVESTMENT IN 
INNOVATIVE FIRMS LOOKING TO SCALE UP 
The consultation deÿned patient capital as “long-term 
investment in innovative ÿrms led by ambitious 
entrepreneurs who want to build large-scale businesses”.33 
Finance is typically provided through an entrepreneur’s own 
long-term commitment to their business and in some 
instances through equity investment from external investors, 
such as business angels, venture capital funds or public 
markets. It is diłcult to classify the investment time 
horizon as this varies by sector, from 3 to 5 years in some 
sectors like ICT to as long as 10 to 15 years in others. 
Patient capital supports smaller businesses enabling them 
to grow into large businesses, which has an important 
impact on UK productivity through the di¤usion of 
new ideas into the economy. A lack of suitable patient 
capital investment can hold back UK businesses from 
successfully commercialising their innovation leading to 
missed opportunities and lower economic output. 
The UK has a high business birth rate and high proportion 
of businesses exhibiting high growth compared to other 
European countries, but the UK and Europe has generally 
performed poorly compared to the US in the process of 
scaling up successful start-ups.34 The Consultation describes 
how this is seen in the lower number of unicorn businesses 
and wider evidence that the UK and other European 
economies show a signiÿcantly higher proportion of static  
ÿrms that do not shrink or grow compared to the US.35 
ANALYSIS CONFIRMS THERE IS A SHORTAGE IN THE 
AVAILABILITY OF PATIENT CAPITAL TO UK HIGH 
GROWTH POTENTIAL FIRMS LEADING TO FEWER 
BUSINESSES SCALING UP 
The UK funding eco-system is currently not fully connected 
and able to support high growth businesses from early 
stage through to listing on a public market, despite recent 
improvements in the availability of seed stage funding in 
recent years. The historic shortage of risk capital available 
in the UK is well-documented with successive Government 
reviews identifying a lack of long-term capital in the UK and 
a shortage of investors able to make larger investments. 
Empirical analysis published in last year’s (2016/17) British 
Business Bank Small Business Finance Markets report 
quantiÿed the extent to which UK VC backed companies 
received fewer later stage follow on rounds compared to 
US companies (ÿgure A.16).36 The report also identiÿed 
subsequent deal sizes for follow on rounds are smaller 
in the UK compared to their US counterparts (ÿgure 
A.17). This suggest UK VC backed companies could be 
underfunded compared to their US counterparts, which 
could impact on their ability to grow and scale up. 
More recent analysis contained in the British Business 
Bank 2017 Equity Tracker report show UK VC investors 
appear to exit their investments at a relatively early stage 
compared to investors in the US, which reduces the 
ability of businesses to scale up (ÿgure A.18).37  UK VC 
backed companies that successfully exit receive fewer 
funding rounds on average compared to companies in 
the US (1.9 compared to 2.7) companies with di¤erences 
existing across all the main exit routes. Developing a 
company to be a position to be able to IPO requires more 
funding than developing a company for a trade sale. 
The analysis showed that it takes 3.5 funding rounds on 
average to exit via an IPO compared to 2.4 for a trade sale. 
Respondents to the Patient Capital Consultation conÿrmed 
a gap in follow-on investment for businesses that had 
already received initial investment. This was sometimes 
deÿned by stage of investment, focusing on Series “B” to 
Series “D” funding rounds. Other respondents referred 
to investment size, with £5 million to £50 million being 
quoted most often as the weakest range of investment. 
The Patient Capital Review Industry Panel also identiÿed 
a speciÿc problem for companies requiring more than 
£5m of equity investment.38 
SMALL BUSINESS FINANCE MARKETS 2017/18 29 
FIG A.16 
COHORT ANALYSIS OF COMPANIES RECEIVING SERIES A/SEED 
FUNDING IN 2008¬10 
Source: British Business Bank analysis of Preqin 
FIRMS WITH SUBSEQUENT FUNDING ROUNDS 
62% 
32% 
9% 
3% 
0% 
0% 
(After Seed/Series A, 2008-10 cohort) 
FIG A.17 
B 
68% 
C 
D 
E 
F 
G 
23% 
10% 
3% 
1% 
UK 
US 
43% 
AVERAGE DEAL SIZE BY FUNDING ROUND 
Source: British Business Bank analysis of Preqin 
75
50
25 
25
50
75 
£ million 
3.1 
4.6 
8.3 
16.9 
4.1 
7.2 
12.7 
22.6 
A 
B 
C 
D 
E 
F 
23.1 
67.8 
41.6 
71.1 
UK 
US 
FIG A.18 
AVERAGE NUMBER OF FUNDING ROUNDS BY EXIT ROUTE 
Source: British Business Bank analysis of Preqin 
4 
3 
2 
1 
0 
IPO 
Trade Sale 
Secondary Sale 
All successful 
exits 
UK 
US 
Rest of Europe 
All Areas 
 
 
  
  
  
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
  
 
  
 
  
  
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
  
 
 
 
 
 
 
 
 
 
30 BRITISH BUSINESS BANK 
The UK (and Europe) has a thinner VC market than the 
US. Last year’s Small Business Finance Markets report 
noted that the European VC industry is trapped in a 
sub-optimal investment cycle with low ÿnancial returns, 
smaller fund sizes and smaller deal sizes. The British 
Business Bank 2017 Equity Tracker report conÿrmed:39 
• UK VC funds are around 1.5 times smaller on average 
than the average US VC fund (£118m compared to 
£180m), which limits their ability to do larger deals 
• The vast majority (98%) of US VC fundraising 
comes from institutional sources like pension funds, 
insurance companies, foundations/endowments, 
etc., whilst in the UK it is much lower (55%) 
• The UK has fewer Limited Partner (LP) investors 
investing in each VC fund compared to the US. 
The average US VC fund has 5.2 LP investors 
compared to 2.9 in UK and 3.0 in Rest of Europe. 
This was veriÿed by the Patient Capital Industry Panel that 
observed institutional investors currently allocate most of 
their capital to listed (and therefore liquid) assets, with a 
lower exposure to equity compared to a decade ago. Only a 
small percentage of their assets are allocated to ‘alternatives’, 
of which a smaller proportion still is allocated to venture 
capital. The panel observed several reasons for the low level 
of investment into VC by institutional investors. The UK 
was perceived to have too few large VC funds and relatively 
unattractive ÿnancial returns. To be attractive to investors, 
the panel suggested VC returns need to show a premium 
over listed equities of at least 2-3%, to compensate for 
the lack of liquidity and lack of control, but historically, 
the average UK VC fund has been unable to achieve this. 
The UK pensions market was also judged to be heavily 
fragmented relative to other G7 countries and so less 
able to invest in risky or illiquid assets. 
There are also barriers on the demand side. Some high 
growth businesses do not use equity ÿnance because they 
fear losing control, thinking it is not a suitable form of ÿnance. 
In addition, many reported not really knowing much about 
equity ÿnance as a reason for not using equity funding.40 
THE BRITISH BUSINESS BANK WILL INCREASE THE 
AMOUNT OF LONGER¬TERM FINANCE AVAILABLE TO 
INNOVATIVE, HIGH¬GROWTH SMALLER BUSINESSES 
THROUGH THE PACKAGE OF SUPPORT ANNOUNCED 
AT AUTUMN BUDGET 
Following the Chancellor’s announcement at Budget 2017, 
the British Business Bank welcomes the £2.5bn of additional 
funding that has been made available to it to support UK 
smaller businesses looking to scale-up and realise their 
growth potential, in order to tackle the patient capital 
funding gap.41 The Bank will work to increase patient 
capital through the following new and existing programmes: 
• A new £2.5bn Patient Capital entity will be incubated 
within the Bank to commercially co-invest alongside 
private sector investors into venture and growth 
capital funds. The entity will be designed from the 
outset with a view to a future sale into the private 
sector once it has built its portfolio and track record, 
subject to a value for money assessment 
• British Business Investments – the Bank’s existing 
commercial arm – will cornerstone a small number 
of large scale, private sector managed fund of 
funds, which will increase the availability of patient 
capital investment into high growth potential 
businesses. A ‘Request for Proposals’ to manage 
the ÿrst phase of these funds (up to £500m) will 
be issued early 2018, and 2 subsequent phases are 
possible subject to the market response 
• The Enterprise Capital Fund (ECF) programme will 
be maintained, and will continue its important role in 
backing new and emerging fund managers unlocking 
at least £1.5bn of new investment. This will provide 
stability to the market, and publicly recognises the 
central role this programme plays in the Bank’s 
equity o©ering. 
The overall aim of these measures is to increase access to 
longer-term ÿnance for innovative, high-growth smaller 
companies so they can achieve their full growth potential. 
The British Business Bank aims to achieve this by crowding 
in private capital, expanding investor diversity, and utilising 
and developing private sector fund management expertise. 
This will help break the current sub-optimal investment 
cycle by creating funds of sułcient size that can make 
follow on investments in their most promising companies. 
We aim to use the Bank’s position as the second largest 
Limited Partner in the UK venture capital market to 
demonstrate the attractiveness of this market to 
investors, with the longer-term ambition of supporting 
the development of sustainable private sector expertise 
in the UK.42 
SMALL BUSINESS FINANCE MARKETS 2017/18 31 
1.4 
INTERNATIONAL COMPARISONS OF 
SMALL BUSINESS FINANCE MARKETS 
• UK smaller business population concentrated in 
service sector and growing relatively rapidly 
• The UK economy is successful at generating start-ups 
• Improved performance in translating start-ups into 
scale-ups 
• UK SMEs have similar patterns in obtaining ÿnance to 
our major competitors 
• Equity ÿnance is twice as large in the US compared to 
the UK, but the UK performs relatively well compared 
to other European countries 
FIG A.19 
SHARE OF ENTERPRISES BY SIZE 
Source: OECD, Entrepreneurship at a Glance, 2017 
100 
80 
60 
40 
20 
0 
France 
United 
Germany 
United 
Kingdom 
States 
1-9 
10-19 
20-49 
50-249 
250+ 
Employees 
Per cent This section explores UK small business ÿnance markets 
in comparison to those in major competitor countries. 
First, the current structure of the economy is examined by 
ÿrm size showing that the UK has a similar concentration 
in micro and small businesses as in major competitors. 
Second, the dynamic nature of the small business 
population is considered, looking at births, growth 
performance and deaths. This highlights the strong 
performance of the UK economy in generating start-ups, 
while the record of translating those into high growth 
ÿrms has improved in recent years. 
Third, the use of external ÿnance is compared, with UK 
SMEs similar in their use and experience of most types 
of debt ÿnance, but usage of equity ÿnance to support 
scale-ups, whilst improving, still falls behind the US. 
Comprehensive data allowing direct international 
comparisons of small businesses has traditionally been 
limited, not least because of di¤erences in the precise 
deÿnition of small businesses. Data availability is, 
however, improving. 
First, the OECD produces regular publications on the 
overall partners of entrepreneurship43 and ÿnance 
used by SMEs. Second, the European wide survey run 
by the European Commission and the European Central 
Bank called Survey on access to ÿnance of enterprises 
(SAFE) o¤ers good insight into the experience of small 
businesses using external ÿnance. 44, 45 However, relatively 
small individual country sample size mean that some 
caution is required in highlighting international di¤erences. 
Where SAFE is used in this report data refers to the latest 
wave of the survey taking place in September and October 
2017 unless otherwise stated. 
The approach taken in this chapter is to make comparison 
with the UK’s major international competitors, ie the 
US, Germany and France, bringing in other countries 
where relevant. 
UK SMALLER BUSINESS POPULATION CONCENTRATED 
IN SERVICE SECTOR AND GROWING RELATIVELY RAPIDLY 
Unsurprisingly, smaller businesses, and more speciÿcally 
micro-businesses (those with fewer than 10 employees), 
account for the overwhelming majority of enterprises 
in all OECD economies.46 The UK has a higher share of 
micro-enterprises than Germany and the US47 but a 
lower share than France (ÿgure A.19). 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
  
 
 
 
 
 
 
  
  
  
  
 
 
 
 
 
 
 
 
 
  
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32 BRITISH BUSINESS BANK 
THE UK ECONOMY IS SUCCESSFUL AT GENERATING 
START¬UPS 
International comparison shows that the UK has been 
e¤ective at starting up active employer enterprises. In 2014, 
the UK had the highest number of births in terms of 
employer enterprises with nearly 300,000 births. Figure 
A.24 shows birth rates48 in the UK exceeding that in France, 
SMALL BUSINESS FINANCE MARKETS 2017/18 33 
FIG A.23 
SIZE DISTRIBUTION OF MANUFACTURING FIRMS 
¯NUMBER OF EMPLOYEES° 
Source:  OECD, Entrepreneurship at a Glance, 2017 
80 
70 
60 
1-9 
10-19 
20-49 
50-249 
250+ 
FIG A.20 
The OECD data also allows comparison of the value added 
Germany and the USA. Amongst the wider OECD dataset 
50 
40
Per cent VALUE ADDED BY ENTERPRISE SIZE ¯NUMBER OF EMPLOYEES° 
by enterprise size. Figure A.20 shows a similar pattern 
only Hungary and Poland exceed the UK on birth rates. 
Source: OECD, Entrepreneurship at a Glance, 2017 
for value added as that observed for share of enterprises. 
A high birth rate may not be a sign of success if the survival 
60 
Compared to Germany, the UK has a higher share of value 
rates of those businesses is low. The UK however, also has 
30 
added in micro and large businesses. France, however has a 
50 
a high one-year survival rate with rates in the US and the 
20
slightly greater share of value added than the UK in micro 
UK signiÿcantly above France and Germany (ÿgure A.25). 
40 
and small businesses, but less in medium and large businesses. 
10 
And not only do the UK’s start-ups have relatively good 
Per cent 30 
Following a decline in enterprise numbers in 2009, there 
survival rates, but they also make a signiÿcant contribution 
0 
has been an upward trend in the number of SMEs in major 
20 
to employment. The UK is the only country in the OECD 
economies since 2012. The latest available data in the 
United Kingdom 
Germany 
database where start-ups, deÿned here as those up 
10 
OECD database reports that the UK SME population was 
to 2 years old, account for more than 35% of employer 
FIG A.24 
6% higher in 2014 than in 2008 (ÿgure A.21). See section 
0 
enterprises, with those enterprises accounting for just 
EMPLOYER ENTERPRISE BIRTHS AS A SHARE OF ACTIVE 
1-9 
10-19 
20-49 
50-249 
250+ 
2.1 for a discussion on more recent trends in the UK SME 
United Kingdom 
Germany 
France 
population which shows further rapid growth since then. 
EMPLOYER ENTERPRISES 
over 10% of employment. 
Source: OECD, Entrepreneurship at a Glance, 2017 
Finally, international comparison of death rates of employer 
FIG A.21 
16
There is also some di¤erence in the size and sector 
businesses, shows the UK mid-table with the 10.1% of 
INTERNATIONAL TRENDS IN SME POPULATION 
distribution of SMEs in some of our major competitor 
14 
Source: OECD, Entrepreneurship at a Glance, 2017 
employer enterprises dying in 2014. In summary, this 
countries. The high-level sector distribution is shown 
demonstrates the success of the UK economy in generating 
12
140 
in ÿgure A.22. The UK is similar to the US, albeit with a 
new start-ups which survive and contribute signiÿcantly 
10
slightly lower share of manufacturing in the UK (6.9% vs 
to UK employment. 
Per cent 130 
7.8%) and a higher share of construction (14.9% vs 13.9%). 
8
 Index: 2008 = 100 120 
In comparison to France, the UK has a higher share 
IMPROVED PERFORMANCE IN TRANSLATING START¬UPS 
6 
110 
100 
90 
80 
2008 
2009 
2010 
2011 
2012 
2013 
2014 
UK 
USA 
FRA 
CAN 
ITA 
FIG A.22 
of service sector enterprises (78.2% vs 73.8%) with 
construction accounting for a higher share of enterprises 
in France (18.6% vs 14.9%). 
As is well known, the UK has a lower share of manufacturing 
than Germany (6.9% vs 8.6%). Manufacturing enterprises 
in Germany are less likely than those in the UK to be micro 
business, but more likely to be small businesses, particularly 
10-19 employees (17.4% vs 10.4%), and medium sized 
enterprises (7.8% vs 4.9%) as shown in ÿgure A.23. 
It is a consistent ÿnding across SME Finance surveys, that 
INTO SCALE¬UPS 
International comparisons of scale-ups are diłcult as 
comparative data is limited, but there are numerous 
potential deÿnitions of scale-up. OECD deÿnes high-growth 
enterprises as those with average annualised growth in 
the number of employees greater than 20% per year, 
over a 3-year period, and with 10 or more employees 
at the beginning of the observation period. 
Based on this OECD deÿnition, there has been an 
improvement in the share of high growth enterprises 
4 
2 
0 
United 
Kingdom 
Germany 
United 
States 
France 
FIG A.25 
SURVIVAL RATE OF ONE¬YEAR OLD EMPLOYER ENTERPRISES 
Source: OECD, Entrepreneurship at a Glance, 2017 
100 
SHARE OF ENTERPRISES BY MAIN SECTORS 
the larger the ÿrm, the more likely they are to make use 
in the UK between 2012 and 2014, with the number of 
Source: OECD, Entrepreneurship at a Glance, 2017 
of certain types of external ÿnance. The di¤erence in 
80
high-growth ÿrms returning to the long-term average 
90 
distribution of manufacturing enterprise size, suggests 
range of 10 to 12 thousand high growth enterprises 
The relatively strong performance of the UK is conÿrmed 
20 
30 
in the latest Eurostat data for 2015.49 Using a deÿnition of  
10 
20 
high growth ÿrms growing employees by 10% or more on 
0 
average over 3 years, the UK share of high growth ÿrms 
0 
United 
Germany 
United 
France 
exceeds that of Germany and France. 
United 
United 
France 
Germany 
Kingdom 
States 
Kingdom 
States 
Manufacturing 
Services 
Construction 
Industry 
Services 
Construction 
80 
that German manufacturers may be more frequent users 
per year. Other OECD countries, such as Germany, have 
60
70 
of external ÿnance than UK manufacturers. 
Per cent seen a fall in the share of high growth enterprises in 
60 
the economy demonstrating the relatively better UK 
Per cent 50 
40
performance since 2012. 
40