Gross bank lending to smaller businesses in 2022 was £65.1 billion, of which 55% came from challengers and specialists, according to data from the British Business Bank.

The total figure represents a 12.8% increase from 2021. However, net lending fell by £8.5 billion, in large part reflecting repayment of Covid loans.

The report reveals the smaller business asset finance market also reached a record level in 2022, with an increase in new business of 11% in 2022 to £22.1 billion. This was driven in part by some easing of supply chain shortages and by rising asset prices.

The data show a considerable drop in the demand for external finance - in Q3 2022, only 33% of smaller businesses were using external finance, compared to 44% the year prior. Gross lending still grew as firms using finance sought larger loans to support their business due to inflationary pressures.

In addition, survey findings show that success rates for those seeking loans fell sharply from 80% to 64% year on year.

Meanwhile, net zero deals outperformed the wider equity market. These deals currently make up 12% of all smaller business equity deals compared to only five per cent in 2018, and deal values are rising even faster. Investment value of net zero-related deals rose by 184% over the past year, soaring to a new record level of £1.7 billion.

Louis Taylor, CEO, British Business Bank, says: “Today’s report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options.

"There are promising signs of growth in the net-zero deal sector as equity finance markets respond to growing demand for investment in green innovation."