UK Lending Landscape in 2025: A Fresh Baseline

The UK’s SME lending landscape in 2025 opens with a blend of optimism and caution. According to the Small Business Finance Markets Report 2025, the total value of finance flowing to smaller businesses in 2024 ticked upward — signalling resilience in the supply of capital even as macro uncertainty persisted. Yet paradoxically, fewer SMEs reported using external finance than in previous years. This divergence between available credit and actual uptake sets the tone for the year ahead.

1. Who’s Supplying the Credit? A Shift in Market Power

Challenger and specialist banks continue their steady advance. They now command around 60% of gross SME lending, a record share that places them well ahead of the big high-street incumbents. Their agility, faster credit processes and sector-specific models have reshaped competitive dynamics.

At the same time, high-street banks are far from retreating. In Q1 2025, they lent £4.6 billion to UK businesses — the sixth consecutive quarterly increase and the strongest quarterly figure since 2022. The signal: while alternative and specialist lenders dominate the margins and growth stories, mainstream banks are quietly rebuilding volumes and re-asserting presence in core segments.

The result is a more pluralistic lending ecosystem than existed even five years ago.

2. But Demand Is Under Pressure

Alongside rising supply, the British Business Bank highlights a clear counter-trend: fewer small businesses are seeking or using external finance. The proportion dropped again in 2024, driven by a mix of:

• Cost sensitivity, with interest rates still elevated by historical standards
• Risk aversion, as SMEs prioritise cash preservation
• Process fatigue, with many citing documentation, approvals, and uncertainty as barriers
• Post-pandemic caution, where businesses have leaned more on internal funds or deferred expansion

This dynamic creates a headline paradox: lending volumes can rise even as a shrinking pool of SMEs participates in the market. Aggregate growth masks persistent gaps in access, confidence, and conversion.

3. What This Means for SME Access — Spark Finance’s View

From Spark Finance’s vantage point, the current environment underscores a crucial distinction:

Growing lending volumes do not automatically translate to universal access.

Many SMEs sit at the margins of the credit market — micro-businesses, rural firms, early-stage ventures, and those lacking collateral or financial track record. For these groups, the availability of credit in the system often does not translate into usable or affordable finance.

The implications for 2025:

• Competition will intensify at the prime and near-prime end of the market, where lenders fight for high-quality borrowers.
• Underserved segments will remain structurally harder to reach, unless underwriting innovation, regional focus, and new data sources play a role.
• Lenders face a widening divergence between capital supply and effective demand — with conversion friction becoming a key battleground.

4. A Baseline for the Series Ahead

This 2025 baseline sets up the themes explored in the wider series:

• Regional & local lending disparities
• The rise of alternative and non-bank lenders
• Interest rate movements and the real cost of credit
• The application-to-approval funnel and where drop-offs occur
• Interpreting SME finance through more intuitive metrics (e.g., lending per hour)

Each of these strands reveals part of a more complex truth: UK SME finance in 2025 is liquid but uneven, competitive but selective, and growing but not universally accessible.

As the year unfolds, we’ll continue to break down the frictions, opportunities, and tactical insights shaping the lending landscape — for both lenders navigating risk and SMEs seeking the capital to grow.