UK Finance has reported a decline in lending to small- and medium-sized enterprises (SMEs) during the first quarter of 2023, attributed to weaker demand. The total gross lending across seven lenders in the sample amounted to £3.7bn, down from £4bn in the previous quarter and £4.9bn in the first quarter of 2022.
The decline in lending showed regional variations, with the South West and Scotland experiencing the largest falls, while the South East (excluding London) saw the biggest increase, with lending rising by more than seven percent quarter-on-quarter.
Despite the overall decline, there are signs of recovery in the demand for finance. Applications for both loans and overdrafts have rebounded, with banks reporting quarter-on-quarter growth of 20 percent and 11 percent, respectively. Loan and overdraft approvals have also increased, marking a contrast from the declines witnessed at the end of 2022.
David Raw, managing director of commercial finance at UK Finance, highlighted the resilience demonstrated by the economy and SMEs amid challenging trading conditions and significant cost pressures. He expects these obstacles to ease gradually throughout the year, supporting the demand for finance. However, muted investment intentions and recent interest rate hikes may dampen the demand to some extent. Raw also mentioned that SMEs still have some flexibility within existing facilities and deposits, which will help them navigate through another potentially bumpy year.
Data from UK Finance revealed that invoice finance and asset-based lending advances had seen a significant increase in 2022. While the rate of advances grew at a slower pace in the first quarter, it remained stronger than other forms of finance since the end of government-backed loan schemes in 2021.
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