Small and medium-sized enterprises (SMEs) in the UK are repaying debt at rates more than 20 times higher than pre-pandemic levels, according to new industry data. The Department for Business and Trade has launched a review into the SME lending market, citing concerns over the lack of “competitive downward pressure” on loan prices.
Figures from UK Finance, which represents major high street banks, show that net lending to SMEs fell by £7 billion in 2023. While repayments have slowed from the peak levels seen in 2022 and 2023—when businesses rushed to settle Covid-era loans—they remain significantly above 2019 levels.
Government officials and the British Business Bank (BBB) worry that the reluctance of banks to extend credit is stifling business expansion and worsening the country’s productivity challenges.
Declining Access to Finance
According to the BBB, just 43% of small businesses accessed external finance in the second quarter of last year, down from 50% in late 2023. This drop has raised concerns about barriers to borrowing, particularly for underrepresented groups, including entrepreneurs with disabilities or those from ethnic minority backgrounds.
The government’s review will focus exclusively on debt finance, excluding equity finance. It aims to identify obstacles to lending and explore ways to create more competitive and affordable loan options for SMEs.
High Costs for Challenger Banks
One key issue is that smaller challenger banks, which rely on raising funds through wholesale markets, face higher borrowing costs than major banks with large deposit bases. This limits their ability to offer lower interest rates to SMEs, making borrowing more expensive for smaller businesses.
Gareth Thomas, Minister for Small Business, highlighted the importance of accessible finance for economic growth.
“For small businesses, getting off the ground is one of the hardest parts of scaling up, and central to that is the ability to access finance,” he said. “That’s why this call for evidence will be important to allow us to see what more needs to be done to support SMEs so they can go for growth.”
Shift in SME Lending Market
Despite an increase in gross lending from major banks—up 13% to £16 billion last year—high street banks now only account for 40% of SME lending, down from 90% in 2008. The remaining 60% of SME loans come from challenger banks such as Allica and Shawbrook, as well as alternative lenders like ThinCats and iwoca.
Ravi Anand, managing director of ThinCats, emphasized the importance of debt finance for business growth, stating that companies using such funding are “seven times more likely to grow than go bust.” He called for regulations requiring major banks to direct borrowers toward alternative lenders if they are unable to provide financing themselves.
Loan Approval Rates Falling
While bank approvals for business loans and overdrafts rose in late 2023—by 23% and 47%, respectively—the overall uptake of overdraft facilities remains weak. The government has warned that the average loan approval rate for businesses is now below 50%, compared to 67% in 2019.
As the review progresses, policymakers hope to find solutions that will boost competition in SME lending and support small businesses in securing the financing they need to grow.
