Before looking at lending flows it helps to understand the size of the SME population and how many businesses actually use external finance. The government’s latest business population estimates show that at the start of 2024 there were about 5.5 million private sector businesses in the UK, of which over 99 percent were SMEs. New data published in late 2025 indicates that by the start of 2025 the business count had risen to 5.7 million, driven largely by self employed and one person companies.
Yet only a minority of these firms are currently borrowing. The British Business Bank (BBB) reports that around 43 percent of smaller businesses were using some form of external finance in Q2 2024, down from about 50 percent in late 2023, and that the share of firms that say they never use external finance has risen to roughly 35 percent (Small Business Finance Markets 2024/25 facts and figures).
A separate government review of small business access to finance notes that only around 3.5 percent of UK SMEs applied for any new or renewed external funding recently, and just 1.5 percent applied for a bank loan, compared with close to one in five SMEs applying for a bank loan in the euro area during a similar period (DBT access to finance call for evidence). In other words, the majority of UK SMEs either do not want to borrow or feel reluctant to even ask their bank.
The same evidence base shows that more than half of smaller businesses that invest rely entirely on internal funds, and that many choose to build cash reserves instead of using external finance. Around a quarter of firms say they invest less than they would like, and around 60 percent say they cancel or scale back investment because they prefer to keep cash on hand.
2. Bank lending to UK SMEs in 2024 and 2025
Although overall demand for finance is muted, headline lending volumes to smaller businesses have started to grow again. The British Business Bank estimates that gross bank lending to smaller businesses reached about £62 billion in 2024, up roughly 4.5 percent on 2023 (Small Business Finance Markets 2024/25). That is the first year since 2020 in which growth in traditional bank lending to smaller businesses has outpaced growth in asset finance.
The latest UK Finance Business Finance Review takes a closer look at the first half of 2025. Key points include:
- In Q1 2025, the main retail banks advanced almost £4.6 billion of new lending to SMEs, around 14 percent higher than in Q1 2024 and the highest quarterly total since mid 2022.
- Lending to the smallest businesses (typically those with turnover up to £2 million) grew fastest, with new lending around 30 percent higher year on year in Q1 2025.
- In Q2 2025, gross SME lending by the main high street banks totalled roughly £4.24 billion, about 8 percent higher than the same quarter a year earlier.
- Within that Q2 figure, lending to the smallest firms was approximately 28 percent higher than Q2 2024, while lending to medium sized SMEs rose by around 2 percent.
- The number of loans approved in Q2 2025 was around 7 percent higher year on year, and the total value of approved loans was up about 11 percent.
Net lending, which takes repayments into account, is still negative for the SME segment, but the gap is closing. UK Finance data indicate that net lending in Q2 2025 was roughly –£1.1 billion, a small improvement on Q1 and the least negative figure since before the pandemic support schemes, excluding the emergency lending period.
One reason net lending remains negative is that SMEs continue to pay down existing facilities and run down cash buffers built up during the pandemic. The Business Finance Review notes that SME deposit balances have fallen by around 20 percent from their 2021 peak, although the pace of decline has slowed since 2023, and that many businesses still hold unused overdraft facilities which they treat as a safety net rather than a source of day to day funding.
Funding Volume Trends (2024-2025)
3. Cost of borrowing and credit conditions for SMEs
The cost of borrowing is one of the main reasons many SMEs are reluctant to take on new debt. Following a series of Bank of England rate increases, interest rates on business loans rose to their highest levels in over a decade during 2023 and early 2024.
The Bank’s latest effective interest rate statistics show that in October 2025 the average rate on new loans to private non financial companies was around 5.8 percent, and the average rate on new loans to SMEs was about 6.3 percent. That is roughly double the cost of borrowing many firms faced in the late 2010s.
Unsurprisingly, small business surveys suggest that this has reduced appetite for debt. The government’s access to finance evidence notes that relatively few SMEs have applied for bank loans in the last year, and that many businesses with good growth prospects are choosing to rely on retained profits rather than take on new bank borrowing at current rates.
On the supply side, though, credit is available. The Bank of England’s regional Agents report that demand for credit from smaller businesses remains subdued but has stabilised, and that banks are competing for lower risk borrowers. For established SMEs with strong financials, there is still plenty of capacity in the system. The challenge is more acute for younger or higher risk firms, which often rely on personal guarantees or alternative finance providers to access the capital they need.
Approval Rates by Product Type
4. The role of alternative finance and asset finance
One of the biggest structural shifts in UK business lending over the past decade has been the rise of challenger banks and non bank lenders. Early in the 2010s, most SME lending was still concentrated in a handful of large banks. Today, the British Business Bank estimates that around 60 percent of total bank lending to smaller businesses is provided by challenger and specialist banks, up from roughly 40 percent in 2018 (BBB Small Business Finance Markets report).
Alongside new banks, specialist asset finance providers, invoice finance houses, peer to peer platforms and private credit funds all play a bigger role than they did a decade ago. Asset finance in particular has become a core way for SMEs to invest in equipment, vehicles and machinery. Figures from the Finance and Leasing Association show that in 2024 its members provided around £39.7 billion of asset finance to businesses and the public sector, enough to fund close to one third of all UK investment in machinery, equipment and purchased software. Separate analysis submitted to government indicates that roughly £23.5 billion of that figure related specifically to SMEs.
The Department for Business and Trade also highlights the role of non bank lenders in this market. It cites FLA data suggesting that in 2023 around 37 percent of new SME asset finance came from non bank providers rather than traditional banks, and notes that marketplace and platform lenders had cumulatively provided several billion pounds of business loans by 2019.
The British Business Bank has deliberately supported this diversification. Since 2014, its various debt and guarantee programmes have helped around 200,000 plus smaller businesses access more than £20 billion of finance through a mix of banks and non bank lenders. Evaluations of schemes such as Start Up Loans and the Recovery Loan Scheme suggest that they have boosted survival rates and brought genuinely additional lending into the market.
For founders and finance managers, the key takeaway is that SME funding is no longer just about a term loan from a clearing bank. Leasing, hire purchase, invoice finance, revenue based advances and other alternative products now sit alongside traditional overdrafts and loans. Choosing the right mix depends on your cash flow profile, collateral, and growth plans.
5. What these lending statistics mean for SMEs planning 2026
Pulling the data together, a few clear themes emerge for 2026 planning:
- Lending volumes are recovering, but demand is still cautious. Gross lending to SMEs through the main banks is rising again, particularly for the smallest firms, yet overall usage of external finance remains below pre pandemic norms. Many businesses are still leaning on cash reserves and internal funds.
- Borrowing is more expensive than it used to be. Average rates on new SME loans are now in the mid single digits, around six percent according to the Bank of England. That is a significant jump from the ultra low rate era, so the hurdle rate for debt funded projects is higher.
- There is more choice of lenders. Challenger banks now account for the majority of bank lending to smaller businesses, and non bank lenders play a bigger role in asset finance and working capital funding. The market is more competitive, but also more complex.
- Government backed schemes still matter. British Business Bank programmes and the successor to the Recovery Loan Scheme continue to support lending that might not otherwise happen, especially for younger firms and those without property security.
For an individual SME, the practical questions are:
- Is now the right time to invest, given current borrowing costs and demand in your sector?
- Which type of finance is best suited to the asset or project you want to fund?
- Are you comparing offers from multiple lenders rather than speaking to a single bank?
- How resilient is your cash flow if rates stay higher for longer than expected?
6. How Funding Agent helps you turn statistics into a real funding strategy
Understanding national lending statistics is useful, but what matters most is how they translate into real options for your business. This is where Funding Agent fits in.
Funding Agent is a UK based business finance broker that works with a large panel of banks, challenger lenders and specialist funders. Our platform uses data and enrichment tools to match your business profile and funding need with suitable products across term loans, revolving facilities, asset finance, invoice finance and more. Instead of filling out multiple application forms and having the same conversation repeatedly, you provide your details once and we help package them in the way lenders actually want to see.
If you are still at the research stage, you can start by using our calculators to understand what different products might cost and how they impact cash flow:
Once you have a sense of what you need, our team can help you compare real offers side by side, understand the trade offs between rate, term and security, and pick a facility that fits your risk tolerance. That might be a straightforward unsecured loan from a high street bank, an asset backed facility from a specialist lender, or a combination of products.
The data shows that banks, challengers and alternative providers all have capital to deploy to viable SMEs. The challenge is navigating that landscape without getting lost or overpaying. Funding Agent exists to close that gap so you can focus on running and growing your business.
Our Approach
Data-Driven
We use real market statistics to match you with the best funding options
Success Rate
72%
Above industry average of 65%
Processing Time
2.8 days
Faster than market average of 5-7 days
7. Key takeaways for founders and finance teams
The 2025 SME lending statistics paint a picture of a cautious but improving market. Lending volumes are up from recent lows, choice of providers is wider than ever, and government backed schemes continue to support firms that might otherwise struggle to raise capital. At the same time, borrowing is more expensive than it was in the previous decade and many businesses are still choosing to rely on internal funds.
If you are planning your funding strategy for 2026, the practical move is to combine a clear understanding of your own numbers with an up to date view of what lenders are actually doing in your sector. Use the statistics here as a benchmark, run the numbers using the tools on Funding Agent, then speak to a broker who can map your situation to real products in the market.
That way, you are not just responding to headlines about interest rates or business confidence, you are using current data to design a funding plan that fits your business.
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