Equity investment in Scotland's smaller businesses reached £403m by the end of 2021's third quarter, more than double the same period in 2020, according to the British Business Bank.
Total investment values increased by 141% compared to the first nine months of 2020 and were already 42% ahead of the £283m registered for the full year. Across the UK, overall equity investment was on track to double from the £8.8bn seen in 2020.
The British Business Bank’s eighth annual Small Business Finance Markets report also found that there were 147 equity deals in Scotland in the first three quarters of 2021, equating to 8% of the UK’s equity deal activity – higher than Scotland’s 6% share of the business population.
Demand for finance in Scotland remains robust, with 30% of smaller businesses surveyed stating they would be happy to use finance to grow.
On the supply side, 2021 saw growth in Scotland’s local venture capital sector, with 65 unique investors now involved in venture capital investing, nearly double the 33 identified in 2017.
Despite the positives seen in Scotland, geographic imbalances in finance remain, resulting in an uneven economic landscape across the UK.
In the October Spending Review, the UK Government announced £150m to provide a new fund for Scottish businesses, administered by the British Business Bank. It will be working with Scottish Enterprise, the Scottish National Investment Bank and local stakeholders to deliver this increased support, with further details to be announced in due course.
A further £150m for the bank’s Regional Angels Programme, which committed £15m to Edinburgh-based Par Equity in 2020, was also announced in the review.
Mark Sterritt, UK network director for Scotland at the British Business Bank, said: “Last year saw the Scottish business community focusing on recovery, with both investor confidence and demand for finance picking up accordingly.
“This year will hopefully see more of a return to normality and continued economic recovery, which should lessen the impact of debt repayments on smaller businesses.
“That said, there may be additional economic issues to contend with in the form of energy price increases and supply chain pressures,” he continued, adding: “Nevertheless, it is important that smaller businesses at any stage of their growth can access the funding they need to achieve their goals, regardless of their location.”
In addition to the growth in equity finance, the report indicates that UK debt markets overall are returning to near pre-pandemic levels. Challenger and specialist banks accounted for just over half of the bank lending market (51%) – a record share, up from 32% in 2020.
The amount of debt held by smaller businesses has significantly increased compared to pre-pandemic levels due to businesses accessing the government’s Covid-19 emergency finance schemes.
At their peak in March 2021, smaller business debt stocks were estimated to be 30% up. Debt repayments are now becoming a smaller share of businesses cash flow as UK economic recovery helps boost their turnover.
The report also looked at various factors impacting entrepreneurs’ willingness and ability to access finance, noting that while ethnic minority-led businesses are more open to using finance, they are less likely to obtain it, and twice as likely to see access to finance as an obstacle to running their businesses.
Among female-led businesses, appetite for external finance has significantly increased to 31%, but remains lower than for male-led businesses at 39%.
Additionally, the report found that in 2021, almost half (47%) of smaller businesses viewed reducing their carbon emissions or environmental impact to be a priority for their business and one in five (22%) would use external finance to help transition their business to net zero.
In contrast, almost three quarters of smaller businesses (71%) viewed maintaining or increasing sales to be a high priority.
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