How small businesses can take advantage of new sources of finance

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At first glance, the data on small-business finance looks worrying. A study by the British Business Bank suggests that lending to small businesses fell in every area of the country other than the southeast last year. That followed the experience of 2022, when lending fell in all regions.

However, all may not be what it seems. The British Business Bank’s analysis is largely based on traditional forms of finance for small businesses: loans and overdrafts, often arranged through the business’s bank account provider. In recent years, we’ve seen a huge expansion in the range of finance on offer to small firms, that are often from new entrants very different from mainstream lenders.

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It is teaming up with a financial technology (fintech) partner to use this data to offer many of its small-business customers pre-approved capital facilities they can draw from when they need the money. Businesses pay a fee for the facility, rather than interest charges as with conventional finances, and don’t have to provide collateral or personal guarantees from directors.

The rapid growth of invoice and asset finance is another example of how the funding environment for small businesses is evolving. Invoice finance enables businesses to borrow against the value of invoices outstanding from customers. Asset finance enables firms to borrow against their physical assets – either existing assets such as plant and machinery, or new assets if they are borrowing to fund investment. Both can provide much more flexible access to finance.

All of which is to say that headlines about lower lending to small businesses may be misleading. It’s certainly true that the supply of traditional credit has diminished in recent years; in truth, it never recovered from the global financial crisis more than 15 years ago, when banks started to reassess their attitude to risk. But demand for such credit is also down, partly because small businesses are realising there are often superior alternatives to the financing options of the past.

For businesses planning their financing – both day-to-day cash flow and longer-term growth finance – getting to grips with this broader range of choices is important. You may find it much easier to get funding than you imagine – and often through products and services that are a much better fit to the needs of your business.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.