High street banks have continued their gradual return to lending for small- and medium-sized enterprises (SMEs) during the second quarter.
This shift comes as the government intensifies its efforts to address the challenges smaller firms face in securing finance, as reported by .
Earlier this year, senior executives were called in for discussions with ministers on ways to enhance lending to SMEs.
In Q2 2025, gross lending to SMEs saw growth cut nearly in half, dropping to eight per cent from 14 per cent in the previous quarter, according to fresh data from º£½ÇÊÓƵ Finance.
Despite marking the sixth consecutive quarter of loan growth, the rate of increase took a hit.
This follows a report from the Department of Business and Trade in March which revealed that overall loan success rates for firms applying for bank finance had fallen below 50 per cent – a significant decrease from an approval rate of 67 per cent in 2018.
The approval rate for medium-sized companies fell year-on-year for the second quarter in a row, even though new lending to these firms increased by two per cent.
However, lending to smaller firms surged by 28 per cent year-on-year, with a 14 per cent rise in approvals quarter-on-quarter. The value of these loans also swelled around 15 per cent, with the average loan hovering around the £100,000 mark.
Challenger banks take over SME lending
The SME lending space has seen increasing competition in recent years with the entry of fintechs such as Allica and OakNorth, and shifts from firms like Metro Bank into the sector.
Challengers now represent 60 per cent of the market, in contrast to 2019 when the four biggest banks comprised 90 per cent of lending.
The º£½ÇÊÓƵ Finance report also observed that demand for approval of new overdraft facilities was "coming off the boil".
The number of overdrafts sanctioned during the quarter marked the year's lowest figure, the report stated.
However, it suggested an earlier spike in overdrafts was probably a "precautionary measure" adopted by smaller enterprises preparing for the consequences of the national insurance rise.
Chancellor Rachel Reeves' 1.2 per cent increase to employer's national insurance contributions took effect from April, creating waves throughout the small business sector.
Nevertheless, º£½ÇÊÓƵ Finance indicated "overdraft utilisation rates... have remained 'fairly static'" for SMEs, suggesting companies had not relied on them extensively.
David Raw, managing director of commercial finance, commented: "There have been important changes announced in the Government's small business strategy this summer, including the extension of the growth guarantee scheme, cracking down on late and poor payment practices, and the launch of the Business Growth Service."
