The Bank’s Small Business Finance Markets 2023/24 report found that by the end of the third quarter of 2023, the total value of equity investment in smaller firms in Scotland had reached £295 million. While this was down on £562m during 2022 and 2021’s £417m, it was well ahead of the ten-year average of £236m.

During the first nine months of 2023 there were 118 equity deals, below the ten-year average of 134. However, the average deal size was the second highest of the previous decade at £2.5m, behind only 2022’s £3.6m.

Scotland performed slightly better than the UK average for year-on-year changes to total investment volumes and the number of deals. Equity investment fell -29% and deals dropped -53% across the UK, with Scotland seeing decreases of -24% and -48% respectively.

The use of external finance by smaller businesses across the UK saw a consistent rise, growing from 41% in Q1 to 50% in Q3 2023. Scotland saw an 11% increase in overdraft use and an 8% increase in credit card use from Q1 2023 to Q2 2023, higher than the 2% and 4% increase nationally over the same period. Working capital was the main reason for seeking finance for 58% of smaller businesses in 2023, up from 53% the year before.

A survey of intermediaries – accountants, lawyers, business support specialists, and brokers – carried out as part of the report found that respondents in Scotland believed that lack of awareness of the financial options available to smaller businesses (70%) and access to finance (51%) were the biggest barriers to demand. Despite Bank of England interest rates being at their highest point since 2008, only 29% cited the cost of finance as an obstacle for smaller businesses.

Last year, the British Business Bank launched its £150m Investment Fund for Scotland to increase the availability and supply of finance to all parts of the country. The fund offers loans ranging from £25,000 to £2m and equity investments up to £5m and is part of the Bank’s commitment to fostering sustainable economic growth by supporting businesses across Scotland.

Susan Nightingale, director UK network, devolved nations at the British Business Bank, said: “Deal-making slowed across the board during 2023, as markets adjusted to 14 consecutive interest rate rises, but the market in Scotland showed a good degree of resilience.

“After a slow start to the year, activity picked up in Q2 and Q3 – the final quarter will hopefully show some positive momentum moving into 2024.

“Awareness of and access to different financing options are regularly highlighted as the biggest challenge when it comes to smaller businesses looking to grow – particularly for entrepreneurs in more remote and rural areas. Our survey demonstrates that they remain the biggest issues, despite other macro-economic factors.”

Ms Nightingale continued: “The Investment Fund for Scotland was set up to provide ambitious business owners with the type of financial support they need, wherever they are based.

“It has been specifically designed for Scotland to address regional imbalances in access to finance and open up new opportunities for smaller firms across a range of sectors. We are already beginning to see the first deals come though and look forward to announcing more soon.”