Cautious optimism returns as more North East businesses use external finance

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The British Business Bank’s fourth Nations and Regions Tracker, published today, finds usage of external finance has increased overall across the North East. However, challenges remain as sentiment on economic opportunity remains subdued among the region’s smaller businesses.
  • External finance usage by North East businesses rose to 52% in 2023, the second highest in the UK
  • However, challenges still remain, with 66% of smaller businesses seeing more threats than opportunities in the recent landscape
  • Equity deals declined across the region in 2023, but showed signs of recovery in H1 2024

Use of external finance rebounds, but sentiment remains subdued Usage of external finance among smaller businesses in the North East saw considerable growth in 2023, with 52% of businesses now leveraging it, up 12 percentage points from the previous year and the second highest level across the UK, behind Wales. The UK economy as a whole followed a similar trend, with 46% of smaller businesses using external finance, a nationwide increase of 10 percentage points.

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Despite this uptick in the usage of external finance by smaller businesses, sentiment remains low across the North East, with 66% seeing more threats than opportunities in the trading environment in 2023. Persistent inflationary pressures are also continuing to impact smaller businesses across the region as 82% of smaller businesses reported having been impacted by rising costs over recent months.

Victoria Mears, Director, UK Network, Midlands and North at the British Business BankVictoria Mears, Director, UK Network, Midlands and North at the British Business Bank
Victoria Mears, Director, UK Network, Midlands and North at the British Business Bank

Mirroring this subdued sentiment, lending levels for smaller businesses also fell across the North East in 2023. The provision of bank loans and overdrafts that were approved or increased by the top SME lenders dropped by 37% across the region, with 3,633 provided. Similarly, the total value fell by 27% in real terms to £467m.

Cautious optimism for the months ahead as equity investments stabiliseWhile sentiment remains subdued, many smaller businesses are becoming cautiously optimistic about the months ahead. Across the North East, 38% of smaller business owners said they would be willing to use external finance to grow, up four percentage points compared to 2022. According to the Nations and Regions Tracker, 38% also said they anticipated needing external finance in the next 12 months, up two percentage points from the previous year.

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This comes as equity investment across the region begins to stabilise in 2024. The North East, similar to much of the UK, experienced a relative slowdown in equity activity in 2023, with 58 equity deals completed, down 23% compared to 2022. The value of these deals also dropped by 40% to £90m.

In contrast, the first half of 2024 has shown encouraging signs of stabilisation. Deal volumes increased by 7% to 31 when compared to the same period in 2023, while deal value rebounded significantly, increasing by 52% to £77m.

Research and development was broadly on a par with the UK as a whole in 2023, with 41% of smaller businesses investing in R&D across the region (vs 39% nationally). An additional 24% were also undertaking new-to-market innovation.

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British Business Bank driving impact across the North East With a focus on supporting businesses outside of London, the British Business Bank has continued to deliver significant support to smaller businesses across the North East through its debt and equity finance programmes.

In March 2024, the Bank launched the £660m Northern Powerhouse Investment Fund II (NPIF II), which for the first time covered the entire North East. The fund aims to drive sustainable economic growth by supporting innovation and creating local opportunity for new and growing businesses, all while breaking down traditional barriers in access to finance.

Across the North East, the Bank’s Start Up Loans programme has also continued to support ambitious entrepreneurs to start up on their own. In the year ending March 2024, 360 loans were provided across the North East with a combined value of £4m.

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Victoria Mears, Director, UK Network, Midlands and North at the British Business Bank, said: “Businesses in the North East, and indeed across the UK, have had to grapple with a more challenging economic environment over the last few years, so it’s encouraging to see some optimism returning across the region. It’s particularly encouraging to see equity investment activity picking up in the first half of 2024, supporting even more innovative businesses across the region.

“At the British Business Bank, our commitment to supporting smaller businesses right across the UK has been unwavering. The North East is home to a thriving ecosystem of innovative businesses, and we’re poised to help them reach their full potential. With the launch of the Northern Powerhouse Investment Fund II the entire North East is covered by the fund, and with our ever-growing Start Up Loans programme, we’re ensuring businesses of all sizes can access the finance they need to grow and, ultimately, drive forward economic growth.”