Bank lending to UK businesses falls to lowest level in nearly 30 years

Bank lending to British businesses has fallen to its lowest level for nearly 30 years, as weak economic growth and tighter regulation on lenders sap credit for small firms in particular.

British bank lending to non-financial companies fell to 59 per cent of UK GDP in the third quarter of 2025, a level last seen in 1998, according to new research from Boston Consulting Group. At its peak in 2008, bank lending to businesses was about 90 per cent of GDP.

Small and medium-sized enterprises were disproportionately affected, with Bank of England data showing that SME loans almost halved over the past 15 years from 12 per cent of GDP in 2011 to 6.5 per cent in 2026. Banks have pivoted away from SME lending, which can be riskier and less profitable because of the work necessary to run due diligence on smaller firms.

Raoul Ruparel, BCG director for growth, said that on the surface the UK’s financial sector still looked strong but it was no longer allocating capital effectively.

The banking sector “has shifted from supporting productivity growth to dragging on it”, he said. “That is a structural problem for the UK economy, not a sector issue.”

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The remaining bank lending has shifted towards property, with real estate SMEs now accounting for 51 per cent of all loans to small businesses, compared with 39 per cent a decade ago. Ruparel said this could itself be harmful to growth: “It doesn’t feel like the most productive use of lending . . . often this is not financing the building but refinancing agreements on existing buildings.”

Private credit — which has boomed since the financial crisis and taken over from banks in providing the riskiest debt — has also failed to pick up the slack, with total credit now 17 per cent below the historical trend.

The lending drop-off comes as banks complain that demand for loans has fallen due to weak economic growth and survey data showed that small businesses are less likely to apply for credit for fear of rejection. This can create a self-reinforcing loop where SMEs stop applying for credit while banks pull back from lending because of insufficient demand.

One senior figure at a UK bank said there was no lack of lending capacity. “All the banks are issuing bold lending targets, but if there is no demand as no one wants to borrow there isn’t a lot we can do. It’s a macro indicator that business investment isn’t going in the right direction.”

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Banks have also become more conservative in their lending approaches since the financial crisis. Rather than financing early-stage companies, banks prefer to give loans secured against property they can seize and sell in the event the borrower does not repay.

Regulators have also pushed for banks to become better capitalised. In November, Michael Roberts, the head of HSBC’s corporate and institutional bank, told the House of Lords financial services regulation committee that the bank’s capital requirements were five times higher when lending to small and medium-sized companies than when it provided funding for private credit groups to finance loans to the same businesses, he said.