SME Debt Disaster Triggers Authorities Assessment 

The UK authorities has launched an eight-week assessment of small enterprise lending, prompted by issues that the UK may very well be falling behind in terms of funding startups.

This assessment, performed by the Division for Enterprise and Commerce (DfT), comes after figures from UK Finance — the British commerce affiliation for banking and finance —  revealed a £7 billion drop in internet lending to SMEs final yr.

The DfT is searching for enter from all UK SME homeowners, inviting them to share their experiences and opinions on accessing and understanding debt finance, akin to financial institution loans and government-backed StartUp Loans.

The assessment will particularly concentrate on debt financing and won’t study fairness financing.

Commenting on the assessment, Neil Rudge, Chief Banking Officer for Industrial at Shawbrook, mentioned: “Since 2008, companies have turn out to be accustomed to low-cost debt, however [the] price of servicing borrowing has risen, and SMEs are feeling the squeeze from all sides.”

The rising price of borrowing

Debt finance is an important lifeline for small companies. ‘Sexier’ types of fairness finance, akin to enterprise capital (VC), usually make the headlines in terms of startup funding. Nonetheless, small loans and grants can typically show extra advantageous for SME development.

That’s as a result of, whereas fairness finance requires founders to promote a portion of fairness within the firm, in debt financing, the enterprise borrows the cash and pays it again at a later date.

That mentioned, debt finance is way much less inexpensive in an financial downturn. Because the UK offers with larger rates of interest and tighter lending situations, SMEs are reportedly repaying debt at ranges greater than 20 occasions larger than pre-pandemic.

Some organisations have barely cleared their money owed from the COVID Bounce Again Loans. Final August, Startups heard from three enterprise homeowners who have been nonetheless saddled with repayments for the pandemic monetary assist scheme.

Now, the DfT assessment highlights the Authorities’s concern that this monetary strain is making SMEs reluctant to borrow capital, hindering development and contributing to the UK’s low productiveness.

UK entrepreneurs want £25m to make it

Within the 2025 Startups 100 Index, launched this January, our 10 top-rated corporations reported they’d raised a median of £25m every. This implies that companies want important monetary backing of ten-figure funding rounds, not less than, to thrive within the present financial local weather.

Coinciding with the launch of the Index, we additionally surveyed 531 enterprise leaders to find that simply 5% of UK companies acquired VC funding in 2024, in comparison with 13% in 2023. 

With demand for debt finance falling, and fairness finance additionally on the decline, the DfT assessment will hopefully supply insights for the Authorities into different, and extra inexpensive, lending choices that SMEs can as a substitute flip to, akin to specialist lenders.

“It’s incumbent on the federal government to boost consciousness of specialist lenders as the primary level of name for SMEs, serving to to create an surroundings the place companies can entry the precise finance on the proper time”, provides Rudge.

“With out intervention, the funding hole for SMEs will persist—hindering innovation, funding, and financial restoration.”