GlobalData
5 min read
The importance of the UK’s SME cohort is pretty well understood. There are about 5.5m SMEs, employing more than 16.5 million people[1], and accounting for more than 48% of business turnover. [2]
But while there’s a huge amount of latent potential scattered across the UK, it can only be fully realised if the correct conditions are created - a new eco-system that is better able to respond to the lending requirements of growing business.
Tackling that issue is the focus of the formal ‘Small Business Access to Finance Call for Evidence’ which was launched by the government in March. Tasked with investigating why small businesses continue to face barriers accessing affordable finance, despite an expanding and increasingly diverse lending market, the hope is that it results in tangible policy changes. Only then will the government be able to meet its ambitious short, medium, and long term growth targets.
It’s quite easy to forget quite how much has changed in the last few years. After the global financial crisis in 2008, around 90% of SME lending was provided by the four largest banks[3]. Now, however, non-traditional lenders provide the majority of SME lending - equal to 60% of annual gross bank lending to SMEs in 2024[4]. Notably, since 2014, 36 new banking licences have been issued to SME lenders.[5]
But as it currently stands, the state of the UK lending landscape is not currently there to support the ambitions of current and future SMEs. The appetite for both looking for and giving credit seems to have been significantly curtailed.
The UK has one of the lowest levels of borrowing by non-financial businesses as a percentage of GDP among G7 countries – a structural weakness that constrains investment, productivity and long-term growth. Figures also reveal that bank SME loan margins are lower than the 1990s, despite a material increase in capital requirements, with lending much more focused on very low risk outcomes as a result.[6]
Part of the challenge is destigmatising ‘debt’ and supporting businesses that have ambition, but have traditionally been discouraged by lenders' limited appetite to fund their growth. It should be a worry to a pro-growth government that the Bank of England’s 2024 SME Finance Survey found that 77% of SMEs say they would prefer to grow slowly rather than borrow to expand at a faster rate[7]. Figures also show that 60% of businesses are not going ahead with investment due to prioritising building up cash reserves[8]
But another contributing factor is undoubtedly also the UKs shift toward a more service focused economy, with the sector now making up 81% of UK GDP. As these businesses typically lack tangible ‘big item’ collateral, they can find their ‘borrow to invest’ options much more limited, meaning that their growth opportunities may well be restricted.
