Post-Pandemic Shift: How Borrowing Behaviours Evolved

The COVID-19 pandemic profoundly altered the landscape of SME finance. Beyond temporary liquidity interventions and emergency lending schemes, the crisis triggered lasting behavioural changes among businesses and lenders alike. As we enter 2025, these shifts are becoming increasingly apparent in borrowing patterns, credit preferences, and risk management strategies.

In this post, we examine how SME borrowing habits have evolved since the pandemic, comparing pre-pandemic behaviour to current trends, exploring the role of alternative finance, and reflecting on the psychological and strategic factors shaping the post-pandemic lending environment.

1. Lower Leverage and Greater Caution

One of the most notable shifts is the reduction in leverage among SMEs. Many businesses have consciously decided to:

• Maintain smaller debt burdens
• Avoid long-term commitments with fixed obligations
• Retain flexibility to respond to unexpected shocks

Why this change occurred

• Pandemic-induced uncertainty highlighted the risks of high leverage. Businesses that overextended in 2020 faced insolvency pressures or cash-flow crises.
• Experience of government-backed support (CBILS, Bounce Back Loans) showed the importance of liquidity buffers without increasing permanent debt.
• Interest rate volatility post-pandemic encouraged firms to favour shorter maturities and flexible credit arrangements.

2. Changes in Borrowing Patterns

Comparing pre-pandemic and 2025 borrowing behaviour reveals several trends:

Application rates

Pre-Pandemic: Steady growth, mostly traditional banking

Current Trends: More selective, cautious applications; some sectors underrepresented

Facility sizes

Pre-Pandemic: Moderate to large

Current Trends: Smaller, targeted facilities; focus on working capital rather than capex

Term preference

Pre-Pandemic: Longer-term loans preferred

Current Trends: Shift toward short-term or revolving credit lines

Product choice

Pre-Pandemic: Primarily bank loans

Current Trends: Increased use of alternative finance (invoice finance, peer-to-peer, asset-backed loans)

Flexibility vs fixed

Pre-Pandemic: Moderate flexibility

Current Trends: High demand for flexible drawdowns, early repayment options

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The trend toward short-term, flexible borrowing reflects SMEs’ desire to manage risk proactively and avoid overcommitting in a volatile economic environment.

3. Alternative Finance Plays a Bigger Role

Post-pandemic, non-bank and alternative lenders have become a critical component of SME finance:

• Invoice finance and receivables-based lending provide liquidity tied directly to business activity.
• Peer-to-peer platforms and fintech lenders offer faster approval cycles, automated scoring, and more flexible terms.
• Specialist lenders allow businesses in sectors under-served by traditional banks to access credit tailored to operational realities.

Alternative finance has filled gaps left by cautious bank lending, particularly for smaller SMEs or those with unconventional risk profiles.

4. Psychological and Behavioural Factors

Beyond structural changes, behavioural shifts have influenced borrowing:

• Risk aversion: SMEs are more sensitive to financial shocks, leading to smaller, more conservative borrowing decisions.
• Capital discipline: Firms increasingly balance growth ambitions with liquidity preservation, ensuring buffers to survive economic stress.
• Shock resilience mindset: Business owners consider scenario planning, cash-flow stress tests, and contingency funding in every credit decision.

These behavioural factors have prompted lenders to adjust underwriting expectations, prioritising resilience and repayment capacity over aggressive growth or expansion-driven lending.

5. Lender Adjustments and Market Response

Lenders, in turn, have modified practices post-pandemic:

• Underwriting focused on liquidity and stress testing rather than purely historical profitability.
• Greater emphasis on monitoring and covenants to detect early signs of financial stress.
• Acceptance of alternative data sources to assess risk for non-traditional borrowers.
• Flexible loan structures designed to accommodate repayment holidays, drawdown options, and seasonal cash-flow variations.

These adjustments have aligned credit provision with SMEs’ evolving preferences for lower leverage, shorter maturities, and flexibility.

6. Strategic Takeaways for SMEs

• Prioritise liquidity buffers: Maintain cash-flow resilience for unexpected shocks.
• Consider flexible facilities: Revolving credit, invoice finance, or short-term lines provide strategic agility.
• Diversify financing sources: Explore alternative lenders to complement traditional bank facilities.
• Engage in scenario planning: Factor stress-testing and risk assessments into borrowing decisions.
• Monitor credit trends: Understanding how lenders perceive risk post-pandemic can improve access and terms.

7. Conclusion: The New Norm in SME Borrowing

The post-pandemic era has reshaped SME borrowing in profound ways:

• Businesses are more cautious, less leveraged, and favour flexibility.
• Alternative finance plays a larger role in bridging gaps left by traditional lenders.
• Risk awareness and shock resilience guide both SME borrowing behaviour and lender underwriting.

While the pandemic accelerated these changes, the resulting behaviours are likely to persist well into 2025 and beyond. SMEs that adapt by balancing financial discipline with strategic borrowing flexibility will be best positioned to navigate future economic uncertainties.