"There were promising signs that demand for new finance may be turning a corner in the final quarter of 2023."
- David Raw, managing director of commercial finance at UK Finance
£3.5 billion was lent to SMEs in the fourth quarter of 2023 – the first quarter not to see a fall since Q2 2022, according to the latest data from UK Finance.
Demand uncertainty, higher interest rates, and the impact of lending taken out during the pandemic all contributed to weakness in gross lending in 2023. However, the decline in gross lending over the previous five quarters came to a halt in the final months of 2023.
UK Finance says its fourth quarter data contains "promising signs" that SMEs are planning for the future and have more confidence to take on new or additional finance.
Approvals for new financing increased over the quarter. The number of new loans rose by 3% and the value of new loans approved was the highest since the third quarter of 2022. Medium-sized businesses saw a more significant increase, with loan approval values increasing by 17%.
The pace of declining SME deposits slowed in Q4 compared to Q3 2023, with deposits at the end of the year nearly a fifth higher than before the pandemic. Meanwhile, monthly repayment trends remained stable despite a seasonal decline reported in December.
The invoice finance and asset-based lending (IF/ABL) sector supported UK businesses with a combined turnover of £316 billion, an annual record. This turnover drove record availability within IF/ABL facilities with lenders offering working capital facilities of over £50 billion at the close of the year. The average value of advance per client was the second highest recorded, with the average client drawing down £584,000.
The second half of 2023 also saw greater sector variation in lending patterns. The manufacturing and agriculture sectors reported two consecutive quarters of increased borrowing in Q3 and Q4, with only real estate and construction continuing to see falls in borrowing throughout the second half of 2023, amid sharp falls in house building activity.
In other sectors there are signs that demand for finance is returning, and lenders are meeting these demands with new loan finance.
In an increasingly competitive market, 59% of SME lending now comes from outside of the big banks.
David Raw, managing director of commercial finance at UK Finance, said: “2023 was another challenging year for SMEs as they continued to face uncertain demand and rising borrowing costs.
“There were promising signs that demand for new finance may be turning a corner in the final quarter of 2023. Approvals for new loans and overdrafts increased and the rise was broad-based across all sectors. This could be a sign that confidence is gradually improving."
