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 more about large businesses, how they function and particularly how they finance themselves. SMEs have been referred to as the backbone of economies around the world. Therefore, SME’s access to finance is systemically important. Using the SME Finance Monitor, a cross-sectional survey by BVA BDRC on 4,500 SMEs each quarter, we dive into how many SMEs use finance, what finance types they used prior to Covid and during Covid, what characteristics make them more likely to use finance and other relevant questions around SME financing. SMEs are defined as having 249 or less employees.

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

Our pre-Covid analysis is conducted over the economically stable period of mid-2018 to end-2019 and the Covid analysis 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 Business Bank found in the three years leading up to 2019, 10 percentage points more medium companies were likely to seek finance than small companies. The European Central Bank also found in 2021 that the use of all types of finance increased with company size.

Chart 1 investigates and highlights the most popular forms of finances used by SMEs prior to Covid. Bank overdrafts and credit cards are most used. Chart 2 shows the most popular reasons for needing finance, if a company stated they had a need for external finance. Charts 1 and 2 link together as different types of finance tend to be used for different purposes. In terms of relating the charts to one another, economists believe that bank overdrafts and credit cards tend to be used for cash flow related purposes and short-term funding gaps, though some SMEs may use them for investment too. Business investment, like capital expenditure (capex), business expansion and research and development (R&D) is better financed by larger facilities such as a loan, making a bank loan more suitable. Leasing and hire purchase facilities are also used for capex and are a more popular form of finance than bank loans. Bank overdrafts and credit cards are likely the most popular forms of finance used by SMEs because of the ease of obtaining them – current accounts tend to automatically come with an overdraft facility and credit cards can be applied 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 driver for productivity, a lack of finance for R&D could be contributing to low productivity in the UK. This could be food for thought for policymakers. Chart 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 another business, approached by a bank 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 changed during the pandemic. Chart 3 shows the most popular forms of finance used by SMEs in 2020 Q4. 41% of SMEs who had a need for finance used bank loans during Covid compared to 25% before the pandemic. With over 50% of these SMEs stating working capital for cash flow as the main reason for needing finance. Other surveys find similar, the British Business 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 Business Loan schemes. Will this start a new trend of SMEs using bank loans more? The latest data so far does not suggest so. The latest SME Finance Monitor reports shows that use of bank 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 access finance as banks were likely less rigorous in their risk assessment of borrowers. The decrease 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, crowd 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 different variables impact the likelihood of something happening) to delve into who the SMEs using external finance are. Our outcome variable was whether a company used external finance or not. Our results show how a range of different variables impact the probability of a company using external finance. Chart 4 displays the results from the regression. We report the marginal effects – these tell us if the change in probability of a company using finance if the independent 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 company 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 being a larger, older, ‘ambitious’ (the company agreed to the statement they had ‘long-term ambition to be a significantly bigger business’) company increases your likelihood of using external finance. Larger companies are more likely to use finance, though the marginal increase in the likelihood of using finance starts to decrease after reaching 51–100 employees. Older companies are also more 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 being old enough to generate a growth rate estimate. This fits with our expectations that more 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 fail within the first five years.

Having a positive turnover growth rate and having ambition to grow increase the likelihood of using finance, too. Companies with a positive growth rate were 9 percentage points more 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 business also 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 business is an alternative to using external finance, however, the regression suggests they are complementary. Additional control 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 company is a sole trader in professional services sector, current account holdings and the regional savings ratio. We find some sectoral heterogeneity – companies in Agriculture, Health and Social work, Transport, Storage and Communication are more likely to use finance. After controlling for regional savings ratios, we do not find any significance of being based in London.


We have much less knowledge about SMEs and their use and access of external finance. From the resources available to us, we find that larger, older, growing SMEs are more likely to use finance. We also see that bank overdrafts and credit cards were popular among SMEs before Covid with many using finance for cash-flow purposes, though during Covid we see bank loans being popular due to their increased availability through Covid loan schemes. Bank loans are now less popular and the British Business Bank show that SMEs are using less of all forms of core finance – bank overdrafts, bank loans/mortgages, credit cards, leasing and hire purchase and grants – as of 2022 Q3.  The terms on which finance was available to SMEs was very different in Covid and we are now seeing increased costs of finance due to rising interest rates. The recent decrease in SMEs using loans fits with the higher cost of borrowing making loans more expensive and reducing activity, but how SME access to and use of finance will change as SMEs navigate the cost of living crisis 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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