5 Uncomfortable Truths About SME Lending in 2025

Small businesses do the heavy lifting, but fair access to finance is still out of reach for many.

In 2024, gross lending rose 13% to just over £16 billion (UK Finance). But repayments outpaced new loans, leaving a funding gap that hasn’t closed.

Debt levels have more than doubled since before the pandemic (OECD, 2024). Many firms now carry liabilities that block their next step.

Across my years in banking, I’ve seen these patterns up close. Since moving into fintech, I’ve written regularly on Finextra about the urgent need to rethink SME finance. From how fintechs are answering SME challenges and why credit risk models need a reset, to the role of non-dilutive funding and what founders should expect from lenders in 2025, the message has been consistent.

Here are 5 uncomfortable truths about SME lending in 2025 and why they can’t be ignored any longer.

1.The lending gap is still growing

Access to finance is still a major hurdle for small businesses.

In early 2025, banks reported a slight rise in SME lending. But that growth was weak. Many firms are repaying debt faster than they borrow. The annual lending rate remains in decline at -1.2% (Bank of England, 2025).

This slow pace isn’t just a number. It reflects deeper problems.

Most banks still rely on traditional lending rules. They favour companies with physical assets like buildings or stock. But many modern businesses — especially those in tech, retail, or services — don’t own much. They’re often left out.

Overdrafts used to fill that gap. In 1998, nearly one in three SMEs had one. Today, it’s just one in twenty (UK Finance, 2024).

With fewer options, many founders are giving up on borrowing.

In one survey, 77% of SMEs said they’d rather grow slowly than take on a loan (The Times, 2024). Not because they’re cautious, but because the system doesn’t support how they operate.

So they delay hiring. Postpone plans. Or rely on credit cards.

This isn’t bad business. It’s a clear signal that lending, in its current form, is falling short.

2. Lending models are stuck in the past

Most small businesses today don’t rely on buildings or machinery to grow. Instead, their value often comes from customers, data, or recurring revenue.

But many banks still use old rules that favour firms with physical assets. This creates a gap. Digital-first businesses, like online shops or software companies, often don’t meet the usual lending requirements. Even when they are growing fast, they may be told no.

The problem runs deeper than just collateral rules.

Credit models still depend on historic data and long financial records. This leaves out many young or fast-growing companies. It also ignores real-time performance. A company could be healthy and gaining traction but still be declined because it does not fit the expected shape. I explored this in more depth in AI in Fintech: Revolutionising Credit Risk Models, where I argued that traditional scoring systems miss the full picture of modern business health.

Regulatory changes are adding pressure.

The Bank of England plans to remove the SME support factor, which currently allows banks to hold less capital when lending to smaller businesses. If removed, total SME lending could drop by up to £44 billion. Lending costs for smaller banks could rise by a third (The Times, 2024).

There is a better way forward.

Lenders can use cash flow data, payment history, or transaction records to judge risk more fairly. Open banking makes this easier, and AI tools can improve speed and accuracy. As EY writes, “AI-based models help lenders make faster, more reliable decisions for SMEs” (EY, 2024).

Small businesses have changed.

Lending models need to change with them.

3. Lending decisions still feel like a black box

1. Poor success rates are holding businesses back

Getting a loan is still far from guaranteed — even for firms that seem stable on paper.

Getting a loan remains far from certain—even for firms that appear strong.

In the first half of 2024, nearly 43 percent of UK SMEs failed to access external finance—a drop from 50 percent a year earlier, according to the OECD’s 2025 Financing SMEs and Entrepreneurs Scoreboard. These figures include businesses with solid revenues, clear growth plans, and healthy repayment histories.

But the numbers only reveal part of the problem. Approval rates also reflect fundamental flaws in risk assessment. Standard credit checks often fail fast-growing or young firms. With no clarity from lenders, owners don’t know why they were rejected or what to try next.

That leaves founders in limbo.

They can follow all the right steps and yet receive a ‘no’ with no explanation or options.

Over time, this uncertainty erodes confidence, ambition, and trust in the system.

2. Lack of feedback keeps SMEs in the dark

When a business is turned down for a loan, the next step should be clear. But often, it isn’t.

Many lenders don’t give feedback when they say no. No explanation. No guidance. Just rejection.

More than half of SMEs that are declined don’t reapply elsewhere. In many cases, it’s not because they’ve run out of options. It’s because they don’t know what went wrong (The Times, 2024).

Without feedback, a founder can’t make improvements. They might assume their business isn’t fundable at all. Or worse, they keep applying and getting rejected for the same reason each time. It’s not just frustrating. It’s costly.

Some turn to credit cards or private loans with high interest rates. Others give up on borrowing altogether. In both cases, the long-term risk is real. A lack of transparency doesn’t just slow growth. It can push good businesses into financial decisions that hurt them down the line.

Fixing this isn’t difficult.

Clear, respectful feedback should be part of every loan decision. It helps build trust. It helps founders grow. And it shows that lenders are committed to working with businesses, not just scoring them.

3. When trust is missing, so is growth

Lending is about more than numbers. It’s about relationships.

When SMEs don’t understand how decisions are made, trust starts to break down. Over time, that distrust can grow into avoidance. Some founders stop applying for loans. Others stop believing they’ll ever be treated fairly.

This creates a bigger problem.

Without transparency, the lending system feels closed off. Business owners can’t see the criteria. They don’t know what to improve. And they have no way to tell whether they were treated the same as another applicant.

That sense of unfairness spreads quickly. Founders share their stories. Communities take note. And soon, lenders are seen as blockers rather than partners.

This trust gap hurts both sides.

Lenders miss out on high-potential businesses that never apply. SMEs miss out on funding that could unlock growth.

As the British Business Bank noted in 2025, “restoring trust between small firms and lenders will be key to unlocking long-term recovery.” (British Business Bank, 2025)

Bridging this gap doesn’t require new tech or big budgets.

It requires openness. Clear standards. Fair answers. And a shared commitment to making SME lending more human and more honest.

4. Hidden fees make lending harder to trust

Even when a business is approved for a loan, the costs are not always clear.

Some lenders advertise low interest rates, but layer in fees that are hard to spot. These might include processing fees, early repayment charges, or monthly service costs that were not clearly explained up front.

This lack of clarity can have real consequences.

A business owner might accept a loan believing it is affordable, only to find the total cost is far higher than expected. This can damage cash flow, delay repayments, or even push a business into default.

In a 2024 study, the British Business Bank raised concerns about lack of transparency in fee structures, especially among non-bank lenders. The report noted that “many SMEs do not understand the true cost of borrowing until after the contract is signed” (British Business Bank, 2024).

When fees are hidden or unclear, trust suffers.

Borrowers feel tricked, not supported. They are less likely to return, and more likely to warn others. Over time, this erodes confidence in the lending market.

Clear pricing should be the standard.

Transparency is not just good ethics — it’s good business. It builds stronger relationships and ensures that funding actually helps businesses grow, not traps them in more debt.

4. Short-term thinking dominates lending decisions

Many lenders focus on what’s safe now, not what could succeed later.

Small businesses often face pressure to show steady profits and low risk right away. But early-stage growth doesn’t always look like that. Some of the strongest companies take time to become stable — especially in sectors like tech, health, or sustainability.

Instead of supporting long-term growth, many loans are structured for short-term returns.

That means higher repayments, shorter terms, and strict conditions. For businesses trying to invest in new products, hire staff, or expand overseas, this can be limiting.

As McKinsey notes, “SMEs are underserved when growth potential is weighed less than current financial position” (McKinsey & Company, 2024).

This mindset leaves out businesses that are doing the right things — reinvesting profits, testing markets, or building customer loyalty — but can’t show traditional financial markers just yet.

The result is a cautious system that slows innovation.

Founders learn to play it safe. Some avoid risk altogether. Others don’t bother applying, knowing the terms won’t support long-term plans.

Lending should fuel ambition, not shrink it.

To do that, lenders need to balance short-term security with long-term value.

5. Support is fragmented and hard to navigate

Funding options for small businesses have never been more varied — but that doesn’t mean they’re easy to access.

From bank loans and government schemes to fintech lenders and grants, the landscape is broad. Yet many founders say the same thing: it’s confusing, inconsistent, and full of dead ends.

Schemes often come with strict criteria, limited windows, or unclear terms.

Others change quickly, or vary by region. Even when support is available, finding the right match takes time most business owners don’t have. A 2025 survey by the Federation of Small Businesses found that 61% of SMEs feel overwhelmed by the number of funding choices — and unsure where to start (FSB, 2025).

This confusion has consequences.

Some founders give up early. Others waste time applying for the wrong product. In some cases, they miss out entirely because the process feels too complex or risky.

Information exists — but it’s scattered. Advice exists — but it’s inconsistent.

For support to work, it has to be simple, visible, and connected. Small businesses don’t need more options. They need clearer pathways.

Helping them find the right funding is just as important as offering it in the first place.

Time to face the facts

SME lending in 2025 is still falling short.

Despite more providers and more tools, the core problems remain the same. Many businesses can’t access the funding they need or don’t trust the system enough to try.

Let’s recap the 5 truths:

• The lending gap is still growing

• Lending models are stuck in the past

• Lending decisions still feel like a black box

Each of these truths reflects a system built for another time.But businesses have changed and lenders must change with them.

If we want SMEs to thrive, not just survive, we need more than fintech innovation. We need clearer lending rules, better data use, and a fairer, simpler path to capital. Lenders, policymakers, and platforms each have a role to play.

As someone who’s worked on both sides of the table, I know change is possible.But only if we stop ignoring the problem and start building the kind of system small businesses actually need.

What needs to change for small businesses to feel confident borrowing again?