What 2025 meant for business funding – and what to expect in 2026
Greg Taylor · Posted on: December 9th 2025 · read
After a turbulent couple of years for UK business finance, in 2025 we saw a shift with ‘high street’ banks re-entering the market with a greater appetite to lend.
The effect of this was loan sizes increased, and we saw business investment begin to climb again. However, the marketplace still remains fractured, with challenger banks growing in influence and regional disparities persisting plus businesses are still understandably navigating cautiously in an unpredictable economic environment.
Looking ahead to 2026, Head of Banking and Finance, Greg Taylor, provides a snapshot of how the funding environment is evolving, and what businesses need to prepare for next.
Traditional banks vs challengers
One main trend of 2025 was the rebound of bank-based debt funding for SMEs, especially small firms, after a period of subdued lending, which was hindered by factors such as the increase to National Insurance Contributions (NIC) and the 2023/24 economic slowdown.
As of 2025, around 45% of small businesses have reported using external finance, which is a small decrease but broadly stable.
Despite fewer firms drawing on finance, the aggregate value of finance provided has grown, and bank-lending totals have risen, indicating larger loans or more financing offered to those that do borrow.
Although traditional banks remain dominant, the real growth story continues to be challenger and specialist lenders. In fact, around 60% of SME lending in 2024 came from challenger banks, and it seems 2025 has followed the same pattern.
The 2025 edition of British Business Bank (BBB) report states that out of the £62 billion gross lending to SME’s in 2024, around 60% came from challenger or specialist banks as opposed to the major legacy banks.
Over the past decade, non-bank lenders and fintech/alternative lenders have increasingly filled the gaps and borrowers appear to be favoring these specialist lenders for flexibility, responsiveness and bespoke solutions, especially in sectors or regions where traditional banks have historically been cautious. The BBB reports significant geographic variation, for example, in 2024, usage of external finance among smaller firms was highest in some regions (e.g. Northern Ireland at ~52%) and weaker in others (e.g. East Midlands and Wales).
Inflation and interest rates
According to a 2025 analysis from a major bank, business investment started the year with its strongest quarterly growth in two years – up 8.1% year-on-year.
This was driven particularly by investments in technology and capital expenditure on infrastructure, transport and IT. However, structural issues remain; historically, the UK has lagged many peer economies in business investment relative to turnover, particularly for smaller firms. Sectors such as tech and manufacturing looked especially active, signaling a potential boost to productivity and long-term growth, but the underinvestment problem for small firms is not fully solved.
Interest rates finally began falling consistently in 2025 after the Bank of England eased its stance. Further cuts to interest rates are predicted however; rates are only expected to be reduced slightly rather than returning to the considerably lower rates of the past decades.
Some industries still face persistent challenges in accessing finance, particularly through traditional banks such as retail, leisure and hospitality, plus certain consumer-driven sectors. For these types of businesses, challenger banks and alternative lenders will continue to play a key role. Sectors that currently stand out for rising investment and borrowing demand include technology, IT and digital infrastructure, transport and logistics plus manufacturing. These sectors are funneling capital into automation, equipment, fleet upgrades and long-term growth capabilities, a strong signal of confidence and forward-planning.
AI and innovation
AI continues to reshape lending and debt advisory services, and in some cases, transactions can now be completed end-to-end with minimal human interaction. However, this should be approached with caution, as today’s systems are still largely functional, but not intuitive, meaning they don’t always understand the intent of why a business is looking to borrow finance, and it can’t yet ask the insightful, strategic questions an advisor would in order to give you the most proactive and suitable advice that is best for your business and it’s strategic goals long-term.
Investment encouraged, gaps remain
The recent Autumn Budget’s investment announcements were welcomed, particularly measures aimed at boosting SME infrastructure and capital investment, yet the UK is still behind its European counterparts in SME productivity and investment. Until structural issues in infrastructure funding, SME support and regional disparities are addressed, the gap will remain on long-term growth.
Supporting clients through 2026
As we look ahead to 2026, we are continuing to support our clients through another year of evolving funding dynamics through a number of ways including sector specific advice – providing help through funding applications and understanding what’s available for certain sectors in particular.
We are also providing more education for business owners and those within a financial role such as finance directors and CFOs who need support with what funding is available through future seminars.
In summation
"businesses across the UK remain cautious, yet optimistic. Investment is growing, and the ‘high street’ banks are re-engaging, and challenger lenders continue to provide flexibility and innovation. But SME’s still face barriers, especially around: Cost of finance, access to information, geographical disparities and navigating a complex funding market. To unlock growth, the UK needs a combination of stronger government support, better awareness and ongoing innovation."
