SME debt crisis triggers government review

The UK government has launched an eight-week review of small business lending, prompted by concerns that the UK could be falling behind when it comes to funding startups.

This review, conducted by the Department for Business and Trade (DfT), comes after figures from UK Finance — the British trade association for banking and finance —  revealed a £7 billion drop in net lending to SMEs last year.

The DfT is seeking input from all UK SME owners, inviting them to share their experiences and opinions on accessing and understanding debt finance, such as bank loans and government-backed StartUp Loans.

The review will specifically focus on debt financing and will not examine equity financing.

Commenting on the review, Neil Rudge, Chief Banking Officer for Commercial at Shawbrook, said: “Since 2008, businesses have become accustomed to cheap debt, but [the] cost of servicing borrowing has risen, and SMEs are feeling the squeeze from all sides.”

The rising cost of borrowing

Debt finance is a vital lifeline for small businesses. ‘Sexier’ forms of equity finance, such as venture capital (VC), often make the headlines when it comes to startup funding. However, small loans and grants can sometimes prove more advantageous for SME growth.

That’s because, while equity finance requires founders to sell a portion of equity in the company, in debt financing, the business borrows the money and pays it back at a later date.

That said, debt finance is much less affordable in an economic downturn. As the UK deals with higher interest rates and tighter lending conditions, SMEs are reportedly repaying debt at levels more than 20 times higher than pre-pandemic.

Some organisations have barely cleared their debts from the COVID Bounce Back Loans. Last August, Startups heard from three business owners who were still saddled with repayments for the pandemic financial aid scheme.

Now, the DfT review highlights the Government’s concern that this financial pressure is making SMEs reluctant to borrow capital, hindering growth and contributing to the UK’s low productivity.

UK entrepreneurs need £25m to make it

In the 2025 Startups 100 Index, launched this January, our 10 top-rated companies reported they had raised an average of £25m each. This suggests that businesses need significant financial backing of ten-figure funding rounds, at least, to thrive in the current economic climate.

Coinciding with the launch of the Index, we also surveyed 531 business leaders to discover that just 5% of UK businesses received VC funding in 2024, compared to 13% in 2023. 

With demand for debt finance falling, and equity finance also on the decline, the DfT review will hopefully offer insights for the Government into alternative, and more affordable, lending options that SMEs can instead turn to, such as specialist lenders.

“It is incumbent on the government to raise awareness of specialist lenders as the first point of call for SMEs, helping to create an environment where businesses can access the right finance at the right time”, adds Rudge.

“Without intervention, the funding gap for SMEs will persist—hindering innovation, investment, and economic recovery.”