Access to finance remains a postcode lottery for UK small businesses

Small businesses in deprived urban areas are less likely to secure finance than those in more affluent or rural parts of the UK, according to new research by the British Business Bank (BBB).

The government-backed economic development agency said its latest annual Small Business Finance Markets report revealed “significant disparities” in access to credit cards, overdrafts and loans across the country — with geography proving to be a major factor in whether businesses can borrow money.

The findings show that where a business is based has a measurable impact on its access to funding. Even within towns and cities, firms in more deprived areas are less likely to obtain external finance, despite being more likely to seek it out to support growth plans.

“This evidence shows that where your business is located has an influence on your ability to access finance, not just at a regional level, but also at a sub-regional level,” the report said.

The study found that entrepreneurs in economically disadvantaged areas were more inclined to look for funding than the national average, but more often discouraged from applying — either due to previous rejections or perceived barriers from lenders.

Richard Bearman, the British Business Bank’s chief development officer, said the organisation was stepping up its efforts to bridge the funding gap.

“The problem we are trying to solve is to ensure that businesses across the UK have access to capital and, where they have potential, we are supporting that potential,” Bearman said.

He added that new debt and equity programmes would ensure that high-growth, high-potential businesses can access capital “wherever they are based”.

The BBB will roll out £340 million in new regional funds next April across the east and southeast of England, completing its network of state-backed investment vehicles across the UK. These regional funds are designed to improve the supply of debt and equity capital for small and medium-sized enterprises (SMEs).

They follow the £660 million Northern Powerhouse Investment Fund II, which began lending to businesses across the North of England last year.

The bank has also expanded access for community development finance institutions (CDFIs) to its loan guarantee schemes. These specialist lenders provide capital to small firms in lower-income areas who have been turned down by high street banks, helping them to invest, hire and grow.

Overall, the report found that the share of smaller businesses using external finance fell slightly last year from 46% to 45%, following a 10-point rise the year before. However, the headline figures mask sharp regional variations.

In the West Midlands, 47% of firms accessed external capital in the past year, compared with just 39% in the East Midlands. The gap widens when measuring appetite for future borrowing — 49% of West Midlands firms said they were willing to use finance to drive growth, compared with only 17% in the East Midlands.

The British Business Bank said its regional funds and community lending partnerships were designed to make the business finance landscape more equitable, reducing the postcode effect that limits funding in disadvantaged areas.

Bearman said the goal was not only to address inequality but to unlock growth potential nationwide. “We want to make sure that location is no longer a limiting factor,” he said.

Read more:
Access to finance remains a postcode lottery for UK small businesses