UK small businesses: A masterclass in resilience or a slow unravelling?
New FXE Lending Monitor reveals affordability and borrower readiness are the core barriers to SME finance – not supply
More than 5.6 million businesses are now registered in the UK – a record high – with entrepreneurial activity hitting new peaks. In 2023 alone, 880,000 new firms were launched, followed by a further 850,000 in 2024. Yet, despite this boom, the latest SME Lending Monitor from Funding Xchange reveals that access to finance remains stubbornly below pre 2020 levels– particularly for working capital.
While the lending market has become more competitive and diverse, with challenger banks and fintechs expanding their reach, the data paints a clear picture: supply is not the problem. Borrower readiness and affordability are the real barriers.
Access to market-based finance for fundable businesses has shown signs of improvement, with stronger progress in 2024. But this recovery remains tentative. Businesses appear to require stronger profiles than at any time in the past decade to successfully access funding. Today, more than 50% of businesses funded through the Bank Referral Scheme have a Gold or Silver profile – compared to just 40% before Covid. At the same time, the success rate of more marginal profiles has halved.
One striking shift is that borrowing is no longer primarily about fuelling growth – but survival. Cash reserves that had provided a buffer during the Covid years have dwindled, with median balances now below pre-crisis levels. As reserves decline, businesses are turning to short term, liquidity-driven lending. But with fewer assets to secure loans against, lenders are placing far greater weight on the financial health of both the business and its owners.
Personal credit scores are now a critical factor. Before Covid, 25% of business owners referred via the Bank Referral Scheme had strong personal scores and accounted for 43% of funded businesses. Post-Covid, that has increased to 33% of referred business owners, who now represent 61% of those who secure funding.
Katrin Herrling, CEO of Funding Xchange, explains in the report: “Commercial lenders are less willing to tolerate a poor personal score to provide business finance… This report seeks to paint a more nuanced picture on how the profile of businesses seeking finance is changing – with a shift towards businesses that are not ready to take funding or can’t afford additional lending.”
This shift is driven in part by the extraordinary level of debt taken on by UK businesses during the pandemic. Government support was among the most generous in Europe – with around
a third of all UK businesses taking out Covid loans, compared to just 10–13% in France and Germany. Uptake was particularly high among the smallest firms. As a result, the median debt-to-turnover ratio in FXE’s data spiked during the crisis and remains at more than double pre-pandemic levels.
At the same time, borrowing has become significantly more expensive. As of May 2025, the UK base rate stands at 4.25%, compared to 2.4% in the Eurozone. This gap means UK SMEs are not only more indebted than their European peers – they also face higher costs to service that debt.
Startups are particularly impacted. Before the pandemic, only 18% of Bank Referral Scheme referrals were firms less than four months old. Today, that share is closer to 40%. Yet most lenders require at least two years of trading history and full accounts. Even the government backed Startup Loan programme sees a success rate of just 1% for businesses introduced via FXE. This mismatch is leaving a growing number of entrepreneurs disillusioned and discouraged – often incorrectly believing they are ‘unfundable’.
Herrling notes: “Based on our experience, the impact of the negative experience can be long lasting: businesses believe ‘they are not good enough’ [and] will forgo applying for finance in the future… This mindset, formed in response to a negative experience, is likely to be a significant contributor to many businesses’ reticence to using finance to grow – turning them into permanent non-borrowers.”
The data suggests that around a third of these startups could become eligible for finance once they have filed a second set of accounts – with that share increasing to over 60% when factoring in revenue growth. But in most cases, applicants receive no feedback and no indication of when or how they might become fundable. This absence of feedback turns potential future borrowers into permanent non-borrowers.
Insolvency data now reflects the pressures building beneath the surface. As cash buffers have declined, business failures have risen. Median cash balances are below pre-Covid levels and continue to fall, while the share of businesses with three or more rejected payments has surpassed pre-pandemic benchmarks.
FXE’s Lending Monitor makes clear that today’s challenge is not market structure, but affordability and readiness. Affordability has historically been the reason behind around 40% of loan declines. With high interest rates, legacy debt from Covid, and weakening financials, that number is now likely even higher.
Despite structural gains from a more competitive lending landscape, the Bank Referral Scheme is not delivering meaningful access for many businesses. While it was intended to offer rejected applicants a second chance, the success rate peaked at just 8.7% in 2019 and has since hovered around 5%. More than 90% of businesses declined by banks continue to face further rejections – despite the growing diversity of lenders.
Herrling concludes: “The UK lending ecosystem has transformed – and that’s a good thing. A more diverse market means better solutions for businesses. But it also creates new policy challenges… A safety net designed for a handful of big banks won’t cut it in this new landscape.”
The report calls for greater transparency for declined businesses, better support in building fundable profiles, and smarter, more modern regulation. Without these changes, many SMEs – especially those at the micro and early-stage end of the market – will remain cut off from the finance they need to grow.
The report can be downloaded from https://fundingxchange.co.uk/wp/wp-content/uploads/2025/05/FXE-LM-Q2-2025_V3_WEB.pdf