Responsible Finance commissions national study of high-cost SME lending

Industry moves towards a coordinated response to loan stacking

Responsible Finance is commissioning national research into high-cost lending to small businesses. Some of its members report that they are refinancing high-cost loans. The study is funded by NatWest Group. The research output is expected early in 2027.

Responsible Finance is the membership body for community development finance institutions, known as CDFIs. These are social enterprises that lend to businesses and people who can afford to repay a loan but struggle to get finance from mainstream lenders. In 2025 CDFIs lent £181.4m to 6,869 small businesses.

The research will answer five questions:

• How large is the high-cost lending market, and who uses it?
• How much of that borrowing is appropriate and sustainable, and how much leads to poor outcomes such as loan stacking?
• What leads businesses to high-cost finance?
• What does problem borrowing cost in cashflow, investment, jobs and business survival?
• Where could outcomes be improved?

The brief tells researchers not to assume that high-cost finance is inappropriate, or that any route to market is responsible for poor outcomes.

This latest study builds on evidence Responsible Finance published in September. Ten community lenders tracked 71 refinancing enquiries from small businesses over three and a half months. 56% involved loan stacking and 69% involved a commercial finance broker. The average rate on the high-cost loans, where known, was 37.4%. Responsible Finance describes this as a small, self-selecting sample, and the new study will test how far the pattern extends.

Guild members, he said, have reported for more than a year that businesses are getting into severe difficulty after taking several short-term loans at once. He calls the result a “debt spiral”. A fairly priced short-term loan can be the right answer to a one-off problem, he said, but “lending should be symbiotic not parasitic, and some elements of the market seem to have crossed that line”. Bassett also leads Finance Connect’s asset finance community.

Loan stacking is a development the industry does not want, and each of the trade bodies has responded. The Finance & Leasing Association has called for lenders, industry bodies and policymakers to work together. The NACFB, the brokers’ trade body, wrote to its members in September about its concerns over stacking and about commission transparency. The Guild has called for the industry to look at the causes together.

Shanika Amarasekara, chief executive of the FLA, told brokers in June that “speed is not the same as suitability”. She has since said the test is whether “the totality of their borrowing is affordable, appropriate and supports their long-term success”.

Businesses have used loans more since the government-backed Covid schemes, and lenders report the same shift in other European countries. FLA members’ new business in loans grew 20% in the first half of 2026. Loans are quick and easy to obtain online and through brokers.

Finance Connect’s survey of asset finance leaders shows how the choice is made. Respondents to the Finance Connect survey ranked speed of decision first among the reasons customers choose a loan, and total cost last. Half said SME customers mostly do not understand the price difference: asset finance pricing clusters at 8–12%, and loans at 12–20% and above. Brokers initiate the product choice in nearly 60% of cases. Asked whether the customer’s interests prevail when the loan pays the introducer more, 58% were not confident and 42% were very confident. These are first-wave results from Finance Connect’s 2026 survey, they reflect the views of asset finance lenders, and they may change with the second wave.

These figures describe different parts of the loan market. The high-cost lenders in the Responsible Finance sample charge well above the rates reported in Finance Connect’s survey.

Several causes have been put forward, and more than one may be true. A lender has described to Finance Connect how stacking can start. In this illustrative account, a business tells a broker it needs £25,000. The broker sends proposals to five loan providers. All five approve, and the business is offered £125,000 and takes it. The loans are described as unsecured but are backed by the director’s personal guarantee. None of the five lenders knows about the other four. The business spends the surplus and later borrows again to meet the repayments.

He also points out that community lenders account for about 0.2% of SME lending, so their experience may not represent the market. Brokers add that slow asset finance pushes customers to loans. Finance Connect’s survey finding on speed supports this.

Finance Connect will examine loan stacking at its conference in London on 24 November, in a panel that includes Jim Higginbotham.

Views differ on the remedy. Responsible Finance has asked government to consider targeted regulation covering affordability checks, pricing transparency and disclosure of broker fees. Rose argues that regulation of business finance already limits choice and competition, and that funders should deal robustly with poor conduct themselves.

The trade bodies want the industry to act in a coordinated way. Finance Connect understands that discussions are under way on a coordinated response.