Challenger banks have outpaced traditional banks when lending to smaller businesses, according to research by the British Business Bank.

Gross bank lending to smaller businesses in 2022 was £65.1 billion, which is an increase of around 13 per cent from 2021.

The report found £35.5 billion of this lending came from challenger and specialist banks, giving them a 55 per cent share of the market.

While gross lending grew, demand for external finance from smaller businesses has dropped. Only 33 per cent of SMEs sought external finance in 2022 compared with 44 per cent the previous year.

The research also revealed that the success rate for businesses applying for loans fell from 80 per cent the previous year to 64 per cent.

Additionally, there is growing demand for investment in green innovation, with the report finding that net zero deals outperformed the wider equity market. These deals make up 12 per cent of all smaller business equity deals compared with just five per cent in 2018.

Commenting on the news Louis Taylor, chief executive of British Business Bank, said: “Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance.”

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