Why UK small businesses still rely on banks for finance

The Bank of England published new analysis on 24 September 2026 setting out where UK companies get their money from, and the picture it draws contains an apparent contradiction. Corporate finance has become markedly more diverse since the 2008 financial crisis. Yet banks still account for at least 65% of the outstanding debt owed by small and medium-sized enterprises (SMEs), an indicative estimate for 2026 Q1, and the stock of SME debt has fallen below 10% of GDP. The analysis, by Bank staff Colm Manning and Allan Mbugua, explains why both things are true at once.

This matters because SMEs are not a niche part of the UK economy. Official estimates put the number of UK private-sector businesses at 5.7m at the start of 2025, of which 99.85% were SMEs, including 5.64m small businesses with 0 to 49 employees, according to the Department for Business and Trade. How that population finances itself shapes hiring and investment across the UK economy.

The Bank's corporate-finance figures cover private non-financial corporations, so they exclude financial firms, public corporations and unincorporated businesses such as most sole traders. That scope matters when comparing this analysis with other business statistics.

How a company can finance itself

A company can draw on retained earnings and other internal funds, raise external equity, or take on debt. The Bank's quantitative analysis is mainly about external debt, but the choice between debt and equity has real consequences for a business owner.

Equity means bringing in founders, angel investors, venture capital or growth-equity investors. It transfers ownership and risk rather than creating a scheduled repayment obligation, but it dilutes existing ownership and can mean a loss of control.

Debt comes through several channels: domestic and international bank loans, bonds and other market-based finance, direct fund lending, commercial real-estate lending, financial leases, insurer loans and leveraged loans. Asset finance, such as leasing and hire purchase, and supply-chain finance, such as invoice finance, sit alongside these and can be more accessible to SMEs than public bond markets. Borrowing carries interest and repayment risk and can affect a business's financial position, whichever channel it comes through.

What changed after the financial crisis

The Bank's analysis shows the stock of bank lending to UK corporates fell by around one third between 2008 and approximately 2015, while market-based finance grew by about 50% over the same period. Bank lending then grew by around one third from about 2015 to the end of 2019. By the mid-2010s, non-bank debt made up more than half of UK corporate debt outstanding, up from around one third before the crisis.

The Bank also finds limited evidence that post-crisis capital and liquidity reforms materially reduced aggregate credit provision. Its judgement is that the reforms made banks better able to keep lending through later shocks, including the market strains of March 2020 when large companies drew on committed bank facilities as conditions tightened. Banks also remain indirectly involved in market-based finance, by underwriting securities, arranging syndicated loans, providing liquidity facilities, and financing the funds and non-bank lenders that sit further along the chain.

The estimated stock of UK corporate debt rose from around £1.2tn at the end of 2019 to around £1.5tn in 2026 Q1. That is growth in cash terms, but it has not kept pace with inflation-driven growth in nominal GDP. A falling debt-to-GDP ratio, on its own, is not evidence that credit has become harder to get.

Why company size changes the answer

Larger companies gained the greatest ability to switch between funding channels after the crisis. They can issue bonds, borrow from institutional investors, or use bank facilities, and move between them as conditions change. SMEs generally cannot do this. Public bond markets require a scale of issuance and a level of public disclosure that most smaller firms do not have.

Why smaller firms still rely on banks

Banks account for at least 65% of outstanding UK SME debt as of 2026 Q1, and the Bank's analysis notes this bank share is higher among smaller SMEs specifically, because much non-bank SME lending is concentrated among larger SMEs. The estimate is indicative, since non-bank finance is harder to measure comprehensively than bank lending.

Part of the explanation is cost. The Bank says many SMEs have limited public financial information, short credit histories and concentrated business models, which makes credit assessment comparatively costly and time-consuming, particularly for young firms and those in niche sectors.

Part of the explanation is returns. Separate Bank analysis published on 19 June 2026 found that SME lending produces the lowest estimated average return on equity for large UK banks among the lending categories examined, mainly because of higher impairment rates and operating costs rather than capital requirements relative to other corporate lending. The Bank cautions that these product-level return estimates are complex and subjective and may differ from individual banks' own calculations.

Challengers changed who lends, not the basic model

Challenger and specialist banks accounted for around 60% of gross UK SME bank lending in 2025, up from 39% in 2012, according to the British Business Bank, whose measure excludes overdrafts. Gross SME bank lending rose 9% to £68bn in 2025, the second-highest nominal annual amount since 2012 after the pandemic-related 2020 peak. Within that, challenger and specialist banks lent a nominal £40bn, the highest recorded in the British Business Bank series, against £27bn from the five largest banks.

This is easy to misread. Gross lending measures new lending made during a period; outstanding debt is the stock still owed. A 60% challenger share of annual gross lending cannot be compared directly with banks' at-least-65% share of the outstanding SME debt stock, because the two measure different things. Some of the sharp rise in Bank of England data series on challenger banks during 2025 also reflects expanded reporting coverage rather than new lending alone.

Challenger and specialist banks are still banks. Their growth represents diversification within regulated bank lending, and it does not by itself reduce SMEs' aggregate dependence on banks. Separately, challenger and specialist banks plus non-bank lenders together provided 68% of overall SME lending in 2025 by the British Business Bank's measure, but this figure sits alongside a different framing, the "big six" grouping the Bank of England uses (which includes Nationwide Building Society) versus the British Business Bank's "big five" comparison. The two are not built on identical perimeters and should not be treated as interchangeable.

Why SME debt is below 10% of GDP

The Bank's new analysis puts estimated UK SME debt at around 12% of GDP in 2011, falling below 10% in 2026 Q1. This differs from the December 2025 Financial Stability Report, which recorded 13% in 2011 Q4 and 8% in 2024 Q4. The packet behind this article does not establish why the two Bank publications differ, whether from data revisions, coverage changes or another adjustment, and readers should treat the exact percentage-point figures as approximate rather than a single settled series.

The Bank says the decline reflects a mixture of weak demand for borrowing and persistent supply-side access barriers, and that distinguishing the two is difficult. On demand, the SME Finance Monitor has consistently classified between 80% and 90% of SMEs as "happy non-seekers" of finance, meaning they are not seeking finance and report no finance-related reason for that position. Separate survey evidence cited by the Bank in 2025 found around 70% of SMEs preferred slower growth to taking on debt. Neither statistic means every non-seeking business would be approved if it applied; it describes stated preference, not tested access. On supply, the assessment costs, thin credit histories and limited collateral described above continue to restrict how much suitable lending is available to smaller, younger firms.

Where non-bank finance fits for smaller firms

British Business Bank data show around 50% of smaller UK businesses used external finance in 2025. In 2025 Q3, the most-used products were credit cards at 19%, overdrafts at 16%, and leasing or hire purchase at around 12% to 13% (the British Business Bank's own infographic and press release give slightly different figures for leasing and hire purchase, which appears to be a rounding or presentation difference rather than a substantive one). These are the everyday tools of SME finance, sitting alongside bank loans rather than replacing them, and much of the non-bank SME debt that does exist is concentrated among larger SMEs.

High-growth companies are a separate case

Traditional secured bank debt can be unsuitable for young, high-growth companies whose assets are mainly software, intellectual property, data or research and development, and whose cash flows are uncertain. There is little for a bank to secure a loan against, and repayment schedules sit awkwardly with unpredictable early revenue. This is one reason such companies more often turn to equity from founders, angel investors, venture capital or growth-equity investors, or to venture debt, rather than to a conventional business loan.

The current picture

The most recent Bank of England Money and Credit release shows UK SMEs borrowed a net £0.8bn from banks and building societies in July 2026, a seasonally adjusted monthly flow, following £0.7bn in June, with the annual growth rate of SME borrowing at 4.1%. The effective interest rate on newly drawn bank loans to UK SMEs was 6.61% in July 2026, up from 6.36% in June. The net-borrowing figures are seasonally adjusted flows; the growth rate and effective rate are separate calculations from the underlying data. All three cover bank lending only, not non-bank finance, and an individual borrower's actual rate will depend on its own circumstances and lender.

None of the figures in this article establish whether any individual business received suitable terms, or whether it was offered finance at all. Approval rates, collateral requirements and reasons for discouragement sit outside what this aggregate data can show. Debt carries an interest cost and a repayment obligation set against the business's own cash flow, and secured borrowing can put assets at risk if repayments are missed. Equity avoids that repayment risk but dilutes ownership and can reduce control over decisions.

What to watch next

The Bank of England's full chart data behind "Who finances UK business?" and its regular Money and Credit statistics will show whether the SME lending and rate trends recorded for July 2026 continue. The August 2026 Money and Credit release was scheduled for 29 September 2026. Readers wanting the definitions behind any of these figures, or details of government-backed finance schemes, should consult the Bank of England and British Business Bank publications directly rather than a commercial intermediary.