SMEs borrowed £3.5 billion in the third quarter of 2023, marking the fifth consecutive quarterly decrease in lending.
This represents a 20% reduction in gross lending compared to 2022, attributed to heightened demand uncertainty, increased interest rates and the lingering effects of pandemic-era loans.
Looking at the current financial landscape
The review delved into the financial landscape of smaller firms during Q3 of 2023.
Q3 witnessed a slight dip in approved loans and overdrafts, maintaining the trend of more overdraft approvals than loans. The decline in overdraft approvals over the past year may be attributed to eased cost pressures, reducing the necessity for cashflow finance.
However, deposits remain a substantial factor limiting demand, as SMEs draw on existing cash reserves. Both current and deposit account balances are still significantly up on pre-Covid levels (19% and 16% respectively).
Accommodation and food services
The pace at which SMEs in the accommodation and food industry are drawing from their savings stands out from the rest of the economy.
In the first half of 2022, deposits in the sector fell by 12%compared with a fall of just over 3% in the SME population as a whole.
There was a similarly rapid pace of decline in the first half of this year - 9% compared with 4% for all SMEs. In the last three months, deposits have slowed compared with the rest of the economy.
SMEs in this sector have taken on new finance, mostly in new overdrafts to manage cashflow challenges, and have used savings to navigate recent cost pressures.
Looking ahead
Looking ahead to 2024, caution prevails among businesses, and the landscape is expected to remain stable until a clearer path to recovery emerges, discouraging long-term investment and expansion.
As a result, UK finance urged businesses to explore available options with lenders in navigating these uncertainties.
David Raw, managing director of commercial finance at UK Finance, said:
"SMEs in all parts of the economy continue to face a challenging outlook. Our data suggests that SMEs are leaning more heavily on existing resources, particularly cash deposits, rather than seeking new finance. The higher interest rates environment will also be suppressing firms' appetite to borrow.
"A stronger demand outlook is ultimately what SMEs need to be confident to make investment decisions for future growth. And the Chancellor's recent announcement on ‘full expensing' of investment could provide an added boost for future plans."
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