SMEs borrow to protect cashflow

SMEs increasingly sought external funding to shore up cashflow in the final months of last year according to data from Purbeck Insurance Services, which reports overall demand for is levelling off despite diverging trends in construction and manufacturing.

Analysis of small business loan activity in Q4 2025 based on data from personal guarantee insurance (PGI) applications suggests borrowing behaviour also remained defensive – the dominant reason for finance was given as working capital to support cashflow, with 37% of all loan applications for this purpose, up from 33% a year earlier in Q4 2024, while applications linked to growth and expansion eased slightly.

Purbeck says the average personal guarantee demand is now £185,000 (based on the level of insurance cover taken) against an average loan of £269,732 in Q4 2025. This loan value has risen 22% on Q4 2024, reflecting inflationary pressures and higher operating costs across the economy.

Construction up, manufacturing down

While the number of PGI applications in Q4 2025 remained almost level with the previous quarter, dipping by just 0.1%, construction applications jumped 10.7% between Q3 and Q4 2025 reflecting ongoing demand for finance linked to contracts and project delivery.

In contrast demand for funding and PGI from manufacturing firms fell by 25.3% over the same period, underlining continued caution around capital investment in the sector.

Looking at the full year, total applications for personal guarantee backed loans and PGI across 2025 were higher than in 2024 overall, although growth was weighted towards the earlier part of the year.

“That said, there are signs of growing ambition beneath the surface based on recent research from Novuna Business Finance. So while our own data indicates that, as businesses move into 2026, the focus remains on stability and cashflow in the near term — this could begin to shift as confidence improves and funding conditions ease, despite ongoing concerns around borrowing costs.”

The research by Novuna Business Finance revealed a five-year peak in the percentage of small business owners (84%) starting 2026 with plans to invest in new growth initiatives, following a challenging trading period during 2025, when the percentage of small business owners predicting growth fell over four consecutive quarters to 25%.

Increasing new business income remained the top priority for SMEs looking to make their enterprises stronger for the year ahead (46%, up slightly on 43% a year ago).

In addition, the percentage of small businesses prioritising the need to reduce fixed costs is up significantly on this time last year from 24% to 40%, while 31% are now prioritising the need to build up financial reserves for the year ahead compared with 23% a year ago.

Jo Morris, Novuna Business Finance Head of Insight commented:

“Despite all this, more than eight in 10 small business owners are going into 2026 determined to find new ways to make their enterprises stronger and more resilient. We last saw this during the pandemic era and the determination of small business owners then to flex and adapt played out in a bounce-back of sector confidence in 2022. After an economically challenging 2025, the sheer scale of businesses prioritising plans to build strength into their enterprises for the year ahead will hopefully result in a much-needed upturn in positive growth outlook from the small business community in the early months of 2026.”

As recent Department for Business and Trade research indicated, UK-based SMEs are lagging their international counterparts when it comes to seeking finance for growth, with lack of knowledge of the products available and difficulties in navigating the market identified as significant barriers to borrowing.

To find out more about the crisis in SME lending, register for the upcoming Finance Connect webinar SME Finance: what needs to change to create better outcomes for SMEs, brokers and lenders? on Friday 13 February at 1pm.

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