UK SME lending hits £68bn after 9% rise in 2025

Smaller business lending in the UK showed signs of recovery in 2025 as credit conditions eased and new lenders continued to reshape the market, according to the latest research from the British Business Bank.

The government-backed bank’s Small Business Finance Markets 2025/26 report found that gross lending to small and medium-sized enterprises (SMEs) rose by 9% to £68bn last year. The figure represents the second-highest level recorded since 2012, behind only the surge in lending during the Covid-19 pandemic in 2020.

The report suggests that while economic pressures persisted in 2025, the UK’s smaller businesses demonstrated resilience, with modest growth in business formation and improved awareness of financing options.

Lending rises despite economic headwinds

Business dynamism showed early signs of improvement in 2025, with 314,000 start-ups created across the UK – a 1% increase on the previous year – contributing to a net rise in the overall business population.

External finance remained widely used, with around half of smaller businesses relying on it during the year. Credit cards (19%) and overdrafts (16%) were the most commonly used finance products in the third quarter of 2025, followed by leasing and hire purchase (13%). The report noted that many firms were using short-term borrowing primarily for stability rather than expansion.

However, awareness of funding options improved. In 2025, 62% of smaller businesses said they knew where to obtain information about different types of finance, up five percentage points from 2024.

Challenger banks dominate SME lending

Competition in the SME lending market continues to evolve, with challenger and specialist banks maintaining a dominant position.

These lenders accounted for 60% of gross SME bank lending in 2025 (excluding overdrafts), a sharp increase from 39% in 2012. When combined with non-bank lenders, they made up 68% of total SME lending last year.

The report highlights the growing diversity of the UK’s lending ecosystem. Since 2013, 28 new providers have entered the smaller business banking market, with 43% of them either current or former delivery partners of the British Business Bank.

Challenger banks have also played a significant role in driving technological innovation in the sector, introducing services such as “bank-in-a-box” platforms, software-as-a-service banking infrastructure and digital-only finance providers.

AI attracts strong investor interest

Equity investment in artificial intelligence companies remained a major trend in the UK’s funding landscape. AI firms raised £2.9bn across 323 deals during the first three quarters of 2025, representing roughly two-fifths of total UK equity investment.

The bank said the figures highlight investors’ growing focus on technology and innovation-driven businesses.

Persistent barriers to finance

Despite improvements in the market overall, the report found ongoing challenges for some businesses in accessing funding.

Ethnic Minority-led businesses displayed higher growth ambitions than their counterparts. Around 71% said they aimed to become significantly larger, compared with 40% of White-led businesses. More than half (52%) also said they were willing to use external finance to grow, compared with 35% of White-led firms.

However, these businesses were also more likely to expect difficulties in securing funding, with 51% anticipating challenges compared with 36% of White-led businesses.

Access to finance also remains more difficult for businesses located in rural and coastal areas, as well as female-led companies.

The British Business Bank said it is addressing these gaps through initiatives including expanded Nations and Regions Funds, the Community ENABLE Funding programme and increased support aimed at improving diversity among fund managers and founders.

Bank pledges increased support

“While economic conditions in 2025 continued to provide challenges for smaller businesses, lending markets are showing signs of positive improvement,” he said.

“Smaller businesses continue to show great resilience and determination to succeed and thrive, creating jobs and investment across the UK, although economic growth will require greater confidence to invest in new capacity and capability.”

Taylor added that following the government’s recent Spending Review, the bank plans to increase its annual funded commitments to around £2.5bn – a two-thirds increase – alongside issuing approximately £2.1bn in guarantees each year to support smaller UK businesses to start, scale and remain in the UK.