UK SME Lending Falls As Banks Retreat

Bank lending to UK businesses has fallen to its lowest level in nearly 30 years, intensifying concern over how effectively the financial system is supplying credit to productive companies. Lending to non-financial businesses dropped to 59% of GDP in the third quarter of 2025, compared with about 90% at its 2008 peak.

Small and medium-sized companies have been hit hardest. SME loans have almost halved over the past 15 years, falling from 12% of GDP in 2011 to 6.5% in 2026. Banks have moved away from parts of SME lending because it can be riskier, more labour-intensive and less profitable than secured lending against assets.

The composition of lending has shifted as well as its scale. Real estate SMEs now account for 51% of all loans to small businesses, up from 39% a decade ago, suggesting that credit is increasingly flowing towards property-linked activity rather than broader business investment. Private credit has not fully filled the gap, with total credit still 17% below the historical trend.

The decline reflects both supply and demand pressures. Banks point to weak economic growth and reduced appetite for borrowing, while smaller firms may be less likely to apply for credit when they expect rejection. That creates a reinforcing cycle: businesses borrow less, banks see weaker demand, and lending capacity remains concentrated in lower-risk areas.

For the banking sector, the issue is not only loan volume but capital allocation. Strong balance sheets matter, but their economic value depends on whether credit reaches firms capable of investing, hiring and raising productivity. A system increasingly cautious around SME finance may look stable on paper while leaving one of the economy’s most important growth engines underpowered.