The British Business Bank’s Small Business Finance Markets 2020/21 report has highlighted a surge in applications for external financial support, including government and local grants, among SMEs – with almost half (45%) of all SMEs surveyed said they applied for external financial support in 2020, compared to 13% in 2019.

At the same time, gross bank lending (excluding overdrafts) to smaller businesses rose to £104bn in 2020, 82% higher than in 2019, driven by the use of government loan schemes.

The report suggests there could be significant further demand for funding throughout 2021 as businesses seek to move on from the pandemic and pivot towards growth, adapt to life outside the EU, improve productivity and transition to a new net-zero economy.

Catherine Lewis La Torre, chief executive of the British Business Bank, said: “This has been an especially challenging period for smaller businesses with external finance playing a vital role in business survival in the face of the Covid-19 pandemic. The British Business Bank has played an important role during the crisis and we will continue to support smaller businesses as they steer a path towards a sustainable recovery.”

Surge in use of government-backed loans and grants while bank overdraft applications flatline

Businesses shifted away from most traditional forms of external finance to utilise government-backed finance schemes and support.

Reflecting this, the utilisation of bank overdrafts, credit cards and asset finance all fell, while the only increase in the usage of traditional repayable external finance was seen in loans, up from around 10% in previous years to 25% in 2020. This is reflected in BBLS and CBILS lending data, which showed around 1.5m facilities approved by the end of 2020. The use of government grant funding by businesses also increased significantly, from 2% in 2019, to 31% in 2020.

External finance most often sought for cashflow with some investing for growth

The report shows that nine in ten (89%) businesses seeking external financial support in the past year did so because of the impact of Covid-19, with 75% of these SMEs seeking external financial support to help with cashflow. Encouragingly 8% sought finance, at least in part, to pivot or change their business model and 7% to invest in the digital capability of their business.