A quick dive into SME finance

Kim Nyamushonongora and Oscar Spencer

99.9% of UK businesses are small and medium-sized enterprises (SMEs), employing 61% of the UK population. Yet, we know so much increasingly well-nigh large businesses, how they function and particularly how they finance themselves. SMEs have been referred to as the backbone of economies virtually the world. Therefore, SME’s wangle to finance is systemically important. Using the SME Finance Monitor, a cross-sectional survey by BVA BDRC on 4,500 SMEs each quarter, we swoop into how many SMEs use finance, what finance types they used prior to Covid and during Covid, what characteristics make them increasingly likely to use finance and other relevant questions virtually SME financing. SMEs are specified as having 249 or less employees.

What types of finance do SMEs use and what are they used for?

Our pre-Covid wringer is conducted over the economically stable period of mid-2018 to end-2019 and the Covid wringer looks at 2020 Q4. We found that 46% of SMEs used external finance. A higher proportion of medium sized companies – employing 50–249 individuals – used finance compared to small companies – which employ fewer than 50 employees. This is in line with expectations, given that the British Merchantry Bank found in the three years leading up to 2019, 10 percentage points increasingly medium companies were likely to seek finance than small companies. The European Central Bank moreover found in 2021 that the use of all types of finance increased with visitor size.

Chart 1 investigates and highlights the most popular forms of finances used by SMEs prior to Covid. Wall overdrafts and credit cards are most used. Orchestration 2 shows the most popular reasons for needing finance, if a visitor stated they had a need for external finance. Charts 1 and 2 link together as variegated types of finance tend to be used for variegated purposes. In terms of relating the charts to one another, economists believe that wall overdrafts and credit cards tend to be used for mazuma spritz related purposes and short-term funding gaps, though some SMEs may use them for investment too. Merchantry investment, like wanted expenditure (capex), merchantry expansion and research and minutiae (R&D) is largest financed by larger facilities such as a loan, making a wall loan increasingly suitable. Leasing and rent purchase facilities are moreover used for capex and are a increasingly popular form of finance than wall loans. Wall overdrafts and credit cards are likely the most popular forms of finance used by SMEs considering of the ease of obtaining them – current finance tend to automatically come with an overdraft facility and credit cards can be unromantic for easily. We find under 5% of companies who need finance state R&D as a reason for needing finance. R&D is typically seen as a very important suburbanite for productivity, a lack of finance for R&D could be contributing to low productivity in the UK. This could be supplies for thought for policymakers. Orchestration 2 shows the most popular reasons stated for needing finance; we exclude other reasons which were stated by fewer SMEs from the chart. These include: to take on staff, to fund expansion overseas, to fund new premises, to take over flipside business, approached by a wall offering funding, a safety net/for safety, IT/online/technology update, stock, marketing/advertising, vehicles, refurbishment/renovation and other.

Chart 1: Companies that had a need for external finance: finance types used by SMEs prior to Covid

Source: BVA BDRC – SME Finance Monitor.

Chart 2: Companies that had a need for external finance: reasons for needing finance prior to Covid

Source: BVA BDRC – SME Finance Monitor.

Nonetheless, things reverted during the pandemic. Orchestration 3 shows the most popular forms of finance used by SMEs in 2020 Q4. 41% of SMEs who had a need for finance used wall loans during Covid compared to 25% surpassing the pandemic. With over 50% of these SMEs stating working wanted for mazuma spritz as the main reason for needing finance. Other surveys find similar, the British Merchantry Bank found in 2021 that 25% of SMEs used loans compared to 10% in past years. This was all in large part due to the Coronavirus Merchantry Loan schemes. Will this start a new trend of SMEs using wall loans more? The latest data so far does not suggest so. The latest SME Finance Monitor reports shows that use of wall loans has decreased from 16% of all SMEs in 2020 Q4 to 11% in 2022 Q4. During Covid, lending was guaranteed by the government and there was a desire for banks to lend as much as possible, making it much easier for SMEs to wangle finance as banks were likely less rigorous in their risk towage of borrowers. The subtract in use of finance by SMEs now may just show a return to the normal financing conditions. Charts 1 and 3 both show the most popular types of finance used by SMEs, we exclude other types of finance which are used by fewer SMEs from the chart. These include: commercial mortgage, grant, export/import finance, prod funding, selective/single invoice finance, asset-based lending and ‘other’.

Chart 3: Finance types used by SMEs in 2020 Q4

Source: BVA BDRC – SME Finance Monitor.

What increases a company’s likelihood of using finance?

After looking into the types of finance used by SMEs and the reasons for needing external finance, we ran a logit regression (a regression showing how variegated variables impact the likelihood of something happening) to delve into who the SMEs using external finance are. Our outcome variable was whether a visitor used external finance or not. Our results show how a range of variegated variables impact the probability of a visitor using external finance. Orchestration 4 displays the results from the regression. We report the marginal effects – these tell us if the transpiration in probability of a visitor using finance if the self-sustaining variable increases by 1. All our regressors are binary variables, so the marginal effect tells us the increase in the probability of using finance if say, a visitor is making profit as opposed to if they are not.

Chart 4: Logit regression results (a)

Source: BVA BDRC – SME Finance Monitor.

(a) Dummy variables excluded to prevent perfect multicollinearity – 1 employee and 2–5 years.

We find stuff a larger, older, ‘ambitious’ (the visitor well-set to the statement they had ‘long-term yearing to be a significantly worthier business’) visitor increases your likelihood of using external finance. Larger companies are increasingly likely to use finance, though the marginal increase in the likelihood of using finance starts to subtract without reaching 51–100 employees. Older companies are moreover increasingly likely to use finance, though, companies younger than two years old have been excluded from this regression as they are unable to provide a growth rate due to not stuff old unbearable to generate a growth rate estimate. This fits with our expectations that increasingly larger, older companies use finance. From the supply side of finance, larger, older companies are likely to have lower credit risk compared to smaller, younger companies. The five-year survival rate of companies born in 2016 was 38%, therefore finance providers may not be as willing to lend to younger companies as over 60% of them goof within the first five years.

Having a positive turnover growth rate and having yearing to grow increase the likelihood of using finance, too. Companies with a positive growth rate were 9 percentage points increasingly likely to use finance compared to companies who do not. A thought-provoking result is that having used personal funds in the past year to fund the merchantry moreover increases the likelihood of using finance, increasing the probability by 11 percentage points. Immediate reactions would have been that using personal funds to fund the merchantry is an volitional to using external finance, however, the regression suggests they are complementary. Additional tenancy variables included in the regression but not shown are sector, region – whether they are London based or not, a dummy variable equal to one if visitor is a sole trader in professional services sector, current worth holdings and the regional savings ratio. We find some sectoral heterogeneity – companies in Agriculture, Health and Social work, Transport, Storage and Communication are increasingly likely to use finance. Without executive for regional savings ratios, we do not find any significance of stuff based in London.


We have much less knowledge well-nigh SMEs and their use and wangle of external finance. From the resources misogynist to us, we find that larger, older, growing SMEs are increasingly likely to use finance. We moreover see that wall overdrafts and credit cards were popular among SMEs surpassing Covid with many using finance for cash-flow purposes, though during Covid we see wall loans stuff popular due to their increased availability through Covid loan schemes. Wall loans are now less popular and the British Merchantry Bank show that SMEs are using less of all forms of cadre finance – wall overdrafts, wall loans/mortgages, credit cards, leasing and rent purchase and grants – as of 2022 Q3.  The terms on which finance was misogynist to SMEs was very variegated in Covid and we are now seeing increased financing of finance due to rising interest rates. The recent subtract in SMEs using loans fits with the higher forfeit of borrowing making loans increasingly expensive and reducing activity, but how SME wangle to and use of finance will transpiration as SMEs navigate the forfeit of living slipperiness is an important issue we plan to follow.

Kim Nyamushonongora and Oscar Spencer work in the Bank’s Financial Stability Strategy and Projects Division.

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