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Table of contents

Approximate read time: 15 minutes

This briefing has been prepared for the 1 May 2025 question for short debate in the House of Lords:

Lord Sharkey (Liberal Democrat) to ask His Majesty’s Government what steps they are taking to improve access to banking and finance for small businesses.

For information on the issue of bank branch closures and their impact on specific communities, see the House of Lords Library briefings:

1.  Background

1.1 What are SMEs?

The government defines small- and medium-sized enterprises (SMEs) as businesses that have under 250 employees.[1] SMEs are the most common type of businesses in the UK. In 2024, of the 5.5mn private sector businesses, 99.8% were SMEs. SMEs are significant employers. In 2024, 60% of private sector employees in the UK worked for SMEs. They are also significant contributors to the UK economy. In 2024, SMEs accounted for 52% of private sector turnover, totalling £2.8 tn. However, the number of SMEs in the UK has declined in recent years, down from a pre-Covid peak of 6mn in 2020.[2]

1.2 What types of finance are available to SMEs?

The British Business Bank (BBB) was established in 2014 as a development bank wholly owned by HM Government, but with operational independence. It has a remit to increase the supply of capital to SMEs.[3] It is not a competitor to commercial banks; instead, it oversees investment programmes, with funds delivered through third parties.

The BBB states there are broadly two types of external finance available to SMEs: debt finance and equity finance.[4] Equity finance involves investment in return for an ownership stake in the business. In addition, mezzanine finance is a hybrid form of finance involving a mix of debt and equity products. The BBB provides the following examples of the two main forms of finance.

Debt finance:

  • Overdrafts: Finance extended by a business’s existing bank or lender, often paid back with interest
  • Term loans: Money borrowed from a loan provider such as a bank and paid back with interest over an agreed period
  • Start-up loans: Government-backed loans to support business formation and growth
  • Asset-based lending: Finance secured against a company’s existing assets, such as property or machinery
  • Peer-to-peer (P2P) lending: Marketplaces of lenders and borrowers, bypassing traditional banks

Equity finance:

  • Venture capital and angel investment: Investment in early-stage businesses, in return for a share in the company
  • Private equity: Investment in established businesses, often for a larger or controlling stake
  • Equity crowdfunding: The use of online platforms to allow investors and the public to buy shares in a business[5]

2. What barriers to accessing finance and banking do SMEs face?

Various reports and surveys in recent years have raised concerns about SMEs’ access to banking services and finance.

2.1 Federation of Small Businesses report 2022

In 2022, the Federation of Small Businesses (FSB) published the report ‘Credit where credit’s due’, which highlighted issues with SMEs’ access to finance. The FSB said an area of concern was the success rate of applications for finance, which it said had fallen to an “all-time low of just two-fifths” of applications. The FSB said the main reason for SMEs having difficulties accessing finance was “application processes being too long and the inability to speak to anyone about the process itself”.[6]

In terms of recommendations, the FSB said the government should encourage the uptake of programmes such as the ‘Bank referral scheme’. The scheme requires that if one of the main high street banks declines an application for finance from an SME, it must refer the business to an online finance platform instead. The FSB also said the government should expand access to BBB-backed loans, and improve the Business Banking Resolution Service (BBRS).[7]

The BBRS provides a dispute resolution service between larger SMEs and certain banks.[8] It is financed by the participating banks. Since the FSB report was published, the BBRS has faced criticism about its performance and the number of cases it has handled.[9] The BBRS closed to new complaint registrations in December 2024.[10]

2.2 Bank of England survey 2024

In March 2024, the Bank of England published the findings of a survey of 2,885 SMEs about their investment decisions in 2023.[11] It found that half of respondents had only used internal funds for investment. The bank said there was a “general theme of aversion to external finance”, with 70% of businesses “preferring slower growth to having debt”. Of those businesses that did use external finance, credit cards were the most widely used source. Firms cited high borrowing costs, strict collateral requirements and economic uncertainty as the key reasons for underinvestment.

2.3 British Chambers of Commerce survey 2024

In April 2024, a survey by the British Chambers of Commerce (BCC) of over 500 firms—mainly SMEs—found that 70% had not accessed external finance over the previous twelve months.[12] Nearly half of respondents said accessing finance had “become more challenging over the past three years”, with only 13% saying it had become easier. The BCC said the main reason firms had sought finance was to help with cashflow issues.

2.4 House of Commons Treasury Committee report 2024

In May 2024, the House of Commons Treasury Committee published the report of its inquiry into SME finance.[13] It said the past five years had been a “torrid time” for small businesses, due to factors such as the Covid pandemic and the energy price spike caused by the war in Ukraine.[14] The committee found that confidence amongst SMEs in accessing finance had fallen and acceptance rates for business credit had “lowered significantly”.

The committee also raised concerns about the “increasing de-banking” of SMEs and “ineffective recourse” to bank dispute resolution. De-banking refers to banks closing customer accounts. The committee said 140,000 SMEs had their accounts closed in 2023. Although the banking sector claimed the majority of account closures were for reasons of fraud or financial crime, the committee claimed that in some cases SMEs were being de-banked due to the nature of the sector the business operated in.[15] The committee also raised concerns that other “unfair banking practices”, such as high collateral requirements for business loans, were suppressing demand for SME finance.

The committee’s recommendations included:

  • The Prudential Regulation Authority’s introduction of new Basel 3.1 financial regulations risked tightening credit conditions for SMEs. Any more stringent capital requirements for SMEs “should be abandoned”.
  • SMEs conducting legal operations “must have access to banking services”. The Financial Conduct Authority should update its guidance to make clear that risk appetite assessments should not be used by banks as a reason to close SME accounts.
  • The BBB plays an “important and positive role” in providing finance solutions to SMEs, but awareness of the BBB and its schemes is “too low”. The government should conduct annual assessments of the BBB’s effectiveness.
  • In terms of bank dispute resolution, the government should support those SMEs currently served by the BBRS. The committee said the BBRS had been “ineffective”, and it agreed that it should close as planned at the end of 2024. However, larger SMEs with turnovers above the Financial Ombudsman Service threshold would still require a route to make complaints about banking services and the government should consult on a “new mechanism” for dispute resolution.[16]

2.5 British Business Bank report 2025

The BBB publishes an annual report on the UK’s small business finance markets. Its 2024/25 report was published in March 2025.[17] The report found that investment by SMEs “continues to be low”.[18] The BBB said this was a “key reason for UK productivity lagging behind other G7 countries”.

The BBB said the proportion of SMEs accessing finance fell from 50% in Q3 2023 to 43% in Q2 2024. It said the “high cost of credit and risk aversion” were the key factors behind a lack of investment. It said credit cards and overdrafts were the most common form of finance, indicating that SMEs were “borrowing for working capital over investment”.

The BBB noted that challenger banks provided most of the lending to SMEs in 2024, continuing an upward trend in recent years. Challenger banks are new, smaller, often digital-only banks that aim to challenge the market dominance of the ‘big four’ UK banks: Barclays, HSBC, Lloyds and Natwest/Royal Bank of Scotland.[19] The BBB reported that of the £62.1bn of gross lending to SMEs in 2024, £37.3bn (60%) was provided by challenger banks.

The BBB also claimed there were demographic disparities in accessing investment. It said ethnic minority-led SMEs cited “difficulties getting finance”, with Black entrepreneurs “particularly affected”.[20]

3. Government policy

As stated above, the BBB is the public body that oversees and promotes the lending sector for SMEs. Through the BBB, there are several government-backed finance schemes:

  • Start up loans: Loans of up to £25,000 for new businesses, in addition to mentoring and advice to entrepreneurs.[21]
  • Growth guarantee scheme: Facilitates loans of up to £2mn per business, 70% backed by the government. The scheme is the successor to the post-Covid “recovery loan scheme”.[22]
  • ENABLE programmes: A range of government-backed schemes to encourage lending to smaller firms, including to SME housebuilders.[23]

The government also encourages equity finance, through schemes providing tax relief to investors. These include the ‘Seed enterprise investment scheme’[24] and the ‘Enterprise investment scheme’.[25]

In December 2024, the Labour government published its response to the House of Commons Treasury Committee report of May 2024.[26] The government said it welcomed the report and it recognised the “crucial role” SMEs play in driving economic growth. The government said it was committed to ensuring SMEs have “access to the finance and services they need”. It said a small business strategy command paper would be published in 2025.[27]

The government gave the following responses to the committee’s recommendations highlighted in section 2.4 of this briefing:

  • On the forthcoming introduction of the Basel 3.1 regulations, the government said that since the committee’s report was published the Prudential Regulation Authority had made adjustments to ensure the “overall capital requirements for SME and infrastructure lending do not increase”.[28]
  • On de-banking practices, the government agreed that current requirements for closure of accounts “could be improved”. It said the Treasury intended to legislate to “ensure customers receive a detailed and specific explanation” when providers close their accounts. This would provide “fair treatment and greater transparency” for customers.
  • On the BBB, the government agreed that it was an important service. The government noted that the 2024 autumn budget had included a commitment to invest £1bn by 2025/26 for the BBB to enhance access to finance for SMEs, including £250mn each year to continue the BBB’s start up loans and growth guarantee scheme.
  • On dispute resolution, the government noted the closure of the BBRS to new registrations from December 2024. It said any decisions on the future of the service were a “matter for the BBRS”. The government said it supported the work of the Financial Ombudsman Service (FOS), but it did not agree that a consultation was “warranted at this stage”. The government said it was “doubtful there is a sufficient volume of customers” to justify a new dispute mechanism for SMEs outside the current FOS framework.

In March 2025, the government launched a call for evidence on small business access to finance.[29] The call for evidence focuses on access to debt finance. It closes on 8 May 2025.

The government said the purpose of the call for evidence was to:

  • assess how far existing government policies meet the needs of business and the lending sector in overcoming barriers to finance
  • understand how the government could provide additional support for SMEs and the lending sector[30]

4. Read more

Image by Edar from Pixabay

References

  1. Department for Business and Trade, ‘Business population estimates for the UK and regions 2024: Statistical release’, 3 October 2024. Return to text
  2. As above. Return to text
  3. British Business Bank, ‘Power of 10: 10 year impact report’, January 2025, p 8. Return to text
  4. British Business Bank, ‘Finance options’, accessed 25 April 2025. Return to text
  5. British Business Bank, ‘What type of finance would be suitable for your business?’, accessed 25 April 2025. Return to text
  6. Federation of Small Businesses, ‘Credit where credit’s due’, December 2022, p 5. Return to text
  7. As above, pp 8–9. Return to text
  8. Business Banking Resolution Service, ‘What is the BBRS?’, accessed 25 April 2025. Return to text
  9. House of Commons Library, ‘Business Banking Resolution Service’, 10 July 2023. Return to text
  10. Business Banking Resolution Service, ‘Business banking resolution service contemporary scheme is now closed to new registrations’, 13 December 2024. Return to text
  11. Bank of England, ‘Identifying barriers to productive investment and external finance: A survey of UK SMEs’, 11 March 2024. Return to text
  12. British Chambers of Commerce, ‘Access to finance challenge for SMEs’, 4 April 2024. Return to text
  13. House of Commons Treasury Committee, ‘SME finance’, 8 May 2024, HC 27 of session 2023–24. Return to text
  14. As above, p 3. Return to text
  15. As above, pp 20–1. Return to text
  16. As above, p 3. Return to text
  17. British Business Bank, ‘Small business finance markets report 2025’, 4 March 2025. Return to text
  18. British Business Bank, ‘Challenger and specialist bank lending hits record high, but overall proportion of smaller businesses accessing finance is down amid challenging economic conditions, finds latest British Business Bank research’, 4 March 2025. Return to text
  19. Moneyguru.com, ‘Would you make the switch to a challenger bank?’, accessed 25 April 2025. Return to text
  20. British Business Bank, ‘Challenger and specialist bank lending hits record high, but overall proportion of smaller businesses accessing finance is down amid challenging economic conditions, finds latest British Business Bank research’, 4 March 2025. Return to text
  21. British Business Bank, ‘Start up loans’, accessed 25 April 2025. Return to text
  22. British Business Bank, ‘Growth guarantee scheme (GGS)’, accessed 25 April 2025. Return to text
  23. British Business Bank, ‘ENABLE programmes’, accessed 25 April 2025. Return to text
  24. HM Revenue and Customs, ‘Apply to use the seed enterprise investment scheme to raise money for your company’, 25 May 2023. Return to text
  25. HM Revenue and Customs, ‘Apply to use the enterprise investment scheme to raise money for your company’, 31 January 2023. Return to text
  26. House of Commons Treasury Committee, ‘SME finance: Government response’, 5 December 2024, HC 517 of session 2024–25. Return to text
  27. As above, p 2. Return to text
  28. As above, p 3. Return to text
  29. Department for Business and Trade and HM Treasury, ‘Open call for evidence: Small business access to finance’, 13 March 2025. Return to text
  30. Department for Business and Trade and HM Treasury, ‘Small business access to finance’, 31 March 2025. Return to text