Net Lending vs Repayments: The Deleveraging Trend

In 2025, SME borrowing behaviour continues to reveal interesting patterns. While much attention focuses on new lending flows, an equally important question is whether businesses are net borrowers or net repayers. In other words, are SMEs taking on more debt than they are repaying, or is the opposite true — a process known as deleveraging?

Recent data provides insight. In March 2025, SMEs borrowed a net £0.1 billion, following prior periods where net repayments exceeded new borrowing. These figures suggest a subtle but meaningful shift: some businesses are prioritising paying down existing debt rather than taking on additional credit. Understanding this trend is crucial for forecasting credit growth, assessing lender capacity utilisation, and gauging the overall health of SME balance sheets.

1. What Deleveraging Looks Like

Deleveraging occurs when repayments outpace new borrowing. For SMEs, this behaviour can be driven by several factors:

• Caution about rising interest costs
  With borrowing rates elevated in recent years, businesses may prefer to reduce debt rather than assume higher-cost liabilities.
• Focus on balance sheet resilience
  Firms with strong cash reserves may prioritise lowering leverage to strengthen their credit profiles and improve borrowing capacity for the future.
• Limited investment opportunities
  Even viable businesses may delay borrowing if economic uncertainty makes expansion risky or costly.
• Operational or seasonal cash-flow considerations
  SMEs may use cash-flow peaks — for example, after a strong Q4 — to pay down debt before the next investment cycle.

Net borrowing data reflects this cautious approach: small net borrowing figures, or periods of net repayment, indicate that liabilities are being actively reduced, rather than businesses accelerating leverage.

2. Implications for Credit Growth and Lending Capacity

Deleveraging trends have broader implications for the SME lending ecosystem.

Slower credit growth

If SMEs continue repaying more than they borrow, aggregate credit growth may stagnate, even if lenders are willing and able to extend funds. In March 2025, the modest net borrowing of £0.1 billion suggests that while lenders were technically open for business, the market’s uptake was restrained.

Lender capacity utilisation

When businesses repay loans rather than draw new credit, lenders’ available capacity may be underutilised. Funds that could have supported expansion projects, capex, or working capital lines remain idle or are recycled into lower-yield placements.

Impact on interest income and risk metrics

Deleveraging reduces lenders’ short-term revenue from interest payments on new loans but can improve portfolio quality and reduce default risk, especially if repayments are concentrated among stronger borrowers.

3. Balance Sheet Health and SME Resilience

From a business perspective, deleveraging has both benefits and trade-offs:

Benefits

• Lower leverage and reduced financial risk
  Less exposure to rate fluctuations and economic shocks.
• Stronger credit profiles
  Improved creditworthiness may unlock better financing terms in future cycles.
• Flexibility for future investment
  With lower existing debt, SMEs have room to borrow selectively when attractive opportunities arise.

Trade-offs

• Slower growth potential
  Paying down debt can reduce funds available for expansion, hiring, or new investment.
• Opportunity cost
  In a low-interest-rate or high-growth environment, conservative repayment may mean missed opportunities to leverage low-cost capital.

The current data implies that SMEs are prioritising resilience over expansion, which is rational in an environment of cautious optimism and cost pressures.

4. Cycles of Net Repayment: Impacts on Lending Momentum

Repeated periods of net repayment can affect the broader SME lending market:

• Choking new lending momentum
  Even if lenders are actively marketing products, capital may be redirected to servicing existing debt rather than new borrowing.
• Reduced market dynamism
  Fewer new loans mean that productive sectors may face slower credit-driven growth.
• Implications for policy
  Government-backed schemes or incentive programs may need to target both demand creation and awareness to counteract voluntary deleveraging.

Effectively, while deleveraging strengthens balance sheets, it can temporarily suppress credit velocity, which in turn may influence economic growth projections.

5. Strategic Takeaways for SMEs and Lenders

For SMEs:

• Balance repayment with strategic borrowing
  Consider whether paying down debt now might limit investment opportunities later in the year.
• Plan borrowing ahead
  Early engagement with lenders in Q1 can position businesses to access finance before cyclical repayment periods slow approval pipelines.
• Monitor interest costs and refinancing options
  Deleveraging is rational if costs are high, but refinancing at lower rates can offer both growth capital and reduced leverage.

For Lenders:

• Recognise shifts in net borrowing behaviour
  Adjust marketing and risk models to account for voluntary repayment cycles.
• Use repayment periods to strengthen portfolio quality
  Focus on client retention, credit monitoring, and early warning indicators during low net-lending periods.
• Coordinate product offerings with SME needs
  Offer flexible facilities that support selective borrowing without increasing systemic risk.

Conclusion: Deleveraging as Both a Risk and an Opportunity

The modest net borrowing seen in March 2025 highlights a subtle deleveraging trend among SMEs, reflecting caution about cost and risk in an uncertain environment. While this behaviour strengthens balance sheets and reduces financial vulnerability, it can also slow credit growth and limit lending momentum, with knock-on effects for the economy and lender strategy.

For SMEs, the key is strategic balance: repay prudently, but retain capacity to invest when opportunities arise. For lenders, understanding and responding to net repayment cycles is essential for optimising portfolio utilisation and maintaining market momentum in 2025 and beyond.