Lending to smaller UK firms rose noticeably last year, signalling a gradual thaw in credit markets after a period of economic strain, according to fresh research released today by the British Business Bank. The organisation’s Small Business Finance Markets 2025/26 report reveals that total bank lending to SMEs climbed 9 per cent to £68 billion in 2025 – the second-highest annual total since records began in 2012, surpassed only by the exceptional Covid-support year of 2020.
Credit conditions eased steadily through the year, helping fuel renewed activity among Britain’s smallest enterprises.
A record 314,000 new businesses were formed in 2025, a modest one per cent increase on the previous year, pushing the overall business population higher.
Roughly half of all smaller firms drew on external finance during the period, favouring flexible, short-term options that support day-to-day stability rather than ambitious expansion.
Credit cards topped the list at 19 per cent usage, followed by overdrafts on 16 per cent and leasing or hire-purchase agreements on 13 per cent.
Knowledge about funding sources also improved.
In 2025, 62 per cent of smaller businesses knew where to find information on different finance products – a five-percentage-point rise from 2024.
This growing awareness coincided with a more diverse lending landscape.
Challenger and specialist banks now account for 60 per cent of gross SME bank lending (excluding overdrafts), up sharply from 39 per cent in 2012.
When non-bank lenders are included, they and their challenger counterparts supplied 68 per cent of all smaller-business credit.
Since 2013, twenty-eight new providers have entered the market, with 43 per cent of them having partnered with the British Business Bank at some stage.
The report also spotlights strong performance in specific sectors.
Artificial intelligence companies attracted £2.9 billion across 323 deals in the first three quarters of 2025, capturing around two-fifths of total UK equity investment and underscoring the appeal of high-growth technology to investors.
Yet challenges remain unevenly distributed.
Ethnic-minority-led businesses displayed greater ambition than their White-led counterparts: 71 per cent aimed to grow significantly larger (compared with 40 per cent) and 52 per cent were prepared to use finance for expansion (versus 35 per cent).
However, they anticipated more obstacles securing funds (51 per cent versus 36 per cent).
Rural and coastal firms, together with female- and ethnic-minority-led enterprises, continued to face the steepest hurdles in accessing finance.
Encouragingly, greater diversity among senior decision-makers at investment firms appeared to boost success rates for diverse founders.
British Business Bank chief executive Louis Taylor welcomed the positive momentum while acknowledging ongoing pressures.
“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.”
To build on this progress, the Bank is ramping up support following the recent Spending Review.
Annual funded commitments will rise to around £2.5 billion – a two-thirds increase – while guarantees issued each year will reach approximately £2.1 billion.
These resources will flow through expanded Nations and Regions Funds, the Community ENABLE program, and initiatives promoting diversity among fund managers and entrepreneurs.
To date, the Bank’s core schemes have already channeled £23 billion to nearly 64,000 smaller businesses (excluding Start Up Loans).
The findings paint a picture of resilient smaller firms navigating a complex environment.
Although demand currently leans toward short-term stability rather than bold investment, the combination of rising lending volumes, new market entrants and heightened awareness points to improving conditions.
Greater business confidence in future growth prospects will be essential if the UK is to translate this momentum into sustained economic expansion.
The British Business Bank’s stepped-up commitments aim to ensure more firms – particularly those in underserved regions and communities – can start up, scale up and remain competitive.