The State of UK SME Funding in 2024

UK Small Business Funding in 2024

The past few years have not been easy for the small business ecosystem within the UK. With economic shocks, a pandemic and ongoing supply chain disturbances, it has become increasingly more difficult to keep small businesses afloat.

Since the start of the pandemic, half a million small businesses have closed down, with many citing the cost of living, lack of support from the government, and broader global issues as the main reasons for them shutting up shop.

Although financial markets and SMEs have come a long way since the start of the pandemic, there are still many challenges, particularly around funding. In this article, we’ll take a look at the current small business landscape in the UK, the issues businesses are facing, and how we can improve the state of funding as players in the finance industry.

The UK’s Small Business Landscape in 2024

Though four years have passed since the start of the COVID-19 pandemic, but it still acts as a significant milestone for small businesses. The smallest companies were among the hardest hit by the economic shock of the pandemic, with 45% of SMEs saying their turnover fell by at least 20% during the period.

If 2020 marked the lowest point for SMEs, the challenges persisted through 2021 and 2022. It wasn’t until 2023 that businesses began to report signs of growth, and the UK business population started to recover.

At the start of 2024, there were 5.45 million small businesses in the UK (businesses with less than 50 employees), which accounted for 99.8% of the total business population, a number that’s now steadily growing. According to the New Startup Index, 468,000 new businesses were established in the first half of this year, putting 2024 on track to be the best of the last five years. In comparison, the total number of companies started throughout the whole of 2023 was 879,000.

If you were to break it down by region, London continues to be home to the largest number of new businesses, but the West Midlands, Yorkshire and the Humber all saw significant increases – as did Northern Ireland, where 92% year-on-year growth was observed.

Current Issues in SME Funding for Small Businesses

It’s not easy starting your own business, in fact, 20% of new businesses fail within their first year of operations. For many entrepreneurs and business owners, gaining access to external funds is key to business growth. However, despite SMEs accounting for three-fifths of employment and around half of turnover in the UK private sector, access to funding can be a large issue.

British Business Bank’s Small Business Equity Tracker 2023 report revealed that equity investment into small businesses has decreased to levels as low as what was observed in 2022. This is a trend we’ve also seen throughout 2023 and into 2024. However, it’s important to note here that 2021 and 2022 may be outliers due to optimistic post-COVID spending, as 2023 figures seem more in line with investing trends witnessed pre-pandemic.

One key issue when it comes to business finance is equal access. Unfortunately, access to funding isn’t equal across the board; for example, small businesses run by women usually have a much harder time accessing funds (despite contributing over £105 billion to the UK economy). There are many barriers to entrepreneurship in the UK which has meant that only 15% of SMEs are women-led and only 5% are run by leadership teams with a majority of black and minority ethnic groups (BAME).

Another issue is around location, as London and the South East have become hotspots for new businesses, they are also the areas that attract the most funding.

Government Startup Support and Small Business Grants

One option for early-stage companies who want to access funds is to seek Government support. It’s a popular option, with the Government granting its 100,000th business loan in early 2023. There are also various start up loans, venture capital schemes, and regional support like the Northern Powerhouse Investment Fund available. As of September 2023, over one billion pounds had been delivered to small businesses through Government loan schemes.

As the government continues to push innovation and support SMEs across the UK, it has introduced the new Regional Investment Zones Programme. This large-scale scheme aims to help new businesses in areas that otherwise don’t receive equal access to funding. The scheme will make up to £160 million available to specific zones over the course of 10 years, with a particular focus on the North and Midlands.

Outside of Government funding, there are many other sources of funds that small businesses can secure in 2024.

UK companies raised £72 billion in venture capital between 2021-2023, making it the third largest market behind the US and China and small business equity investment is up 182% over the last 10 years. However, there have also been reports that funding into early-stage businesses has hit six-year lows in 2024, with the Government being blamed for failing to encourage business activity across the UK.

Additionally, in recent years we have seen more small businesses turn away from traditional bank loans in favour of alternative methods. There are rising issues of stringent eligibility criteria, lengthy approval processes and high collateral requirements for bank loans that can be hard to justify in an already risky economic environment.

It also looks to be a two-sided affair, 83% of brokers think high street banks have limited their funding support to SMEs, leading to just over half of small businesses now having a negative view of major banks. It’s easy to see why SMEs have such negative opinions, especially when the success rate of SME bank loan applications dropped from 80% in 2018 to around 50% in just five years.

Revenue-based finance has now become a legitimate alternative for many small businesses that deal with seasonal fluctuations, like hospitality and tourism. Rather than needing to repay loans in lump sums, funding can be paid back as customers pay the company, providing much more flexibility.

How We Can Improve Funding For UK SMEs

At a time when small business owners have a growing distrust for major high-street lenders, providing efficient alternatives is a wise move. 59% of gross lending in 2023 came from challenger and specialist banks (the third year in a row where they have exceeded the big five banks), signalling that small businesses are interested in securing alternative means of finance when growing their business.

50% of SMEs used finance in 2024 Q3, which is already up significantly from the start of the year (where 41% of businesses used finance). With rising costs, the need for external finance is only going to become greater for small businesses, and it’s important that the financial industry offers suitable solutions if we want to maintain a culture of innovation and entrepreneurship.

At 365 finance, we have increased our number of deals by just over 15% between 2023 and 2024 as our customers and brokers seek more flexible loan arrangements and quicker access to funds.

We provide revenue-based funding of £10,000 to £400,000 in capital so your customers can thrive all year round. We collaborate with thousands of UK brokerages, providing unsecured finance solutions to small businesses – and market-beating commissions for you as an introducer.

To find out more, please contact a member of our partnerships team or head to our website.