SME debt finance reform: what the Government’s latest response means for businesses
Many small businesses continue to face challenges accessing finance from lenders, especially traditional forms of debt finance (loans and security), despite SMEs’ critical role in the UK economy and global supply chain. Alternative financing models, such as invoice financing, are becoming more mainstream as SMEs consider other options to raise capital and funds to support their business grow and meet payment deadlines, albeit there are alternative financial models starting to take shape.
The Government launched a call for evidence on 13 March 2025, to gain a clearer understanding of the barriers preventing SMEs from accessing the finance they need to grow and invest.
The Government’s response was published on 4 December 2025 and summarised findings across four themes:
- barriers to the demand for finance;
- characteristics of the lending market;
- alternative models of finance; and
- underserved entrepreneurs.
Barriers to the demand for finance
The response found that a lack of financial literacy is a common barrier that SMEs face, with uncertainty about products, terminology and the “right” funder reducing confidence to borrow.
Respondents highlighted a need for better signposting, simpler guidance and better access to support. The Government’s digital Business Growth Service which launched in June 2025 aims to streamline this landscape by making it quicker and easier for SMEs to access Government advice and support within a single platform. This toolkit may provide helpful information and roots to market for owner managed businesses and for those who are hunting growth (fast).
Characteristics of the lending market
The Government response explored developments in the lending market that may impact the supply of finance to SMEs. Respondents highlighted both challenges and opportunities, including a shift toward more cautious lending and stricter affordability checks following the Financial Crisis in 2008.
A notable topic of discussion was the role of personal guarantees in debt transactions. Finance stakeholders argue that personal guarantees are necessary to manage risk whilst many SMEs see personal guarantees as a barrier, especially amongst underserved groups. The Government now plans, as a “priority”, to ensure that personal guarantees for facilities delivered through the Growth Guarantee Scheme (GGS) with those loans back by a 70% Government guarantee, launched by the Government in July 2024, are used proportionately and communicated clearly.
Alternative models of finance
Respondents also highlighted a need to diversify the lending landscape with alternative models of finance.
Community Development Finance Institutions (CDFIs) are already pivotal in expanding access to finance and Government initiatives such as the Community ENABLE Funding programme (operationally launched in May 2025) and the forthcoming CDFI Roadmap, could improve their impact. Lastly, some respondents suggested a need to provide more support to co‑operative and mutual businesses, who face their own barriers to accessing finance; some suggestions are for regional mutual banks, though not yet established in the UK, which could help foster long-term customer relationships, offering more personalised lending.
Underserved entrepreneurs
Underserved entrepreneurs, including women, ethnic minorities, disabled entrepreneurs and those in deprived areas, continue to face disproportionate barriers to accessing finance, often driven by risk‑aversion and may suggest some prejudice from certain lenders.
The response discussed various Government initiatives which aim to address these issues, including the Investing in Women Code, the Disability Finance Code and the ‘Backing Your Business’ plan. Respondents also strongly supported the recommendations of the Alison Rose Review (2019) and CREME’s Time to Change report (2022), both of which set out comprehensive strategies to improve access to finance and support for women and ethnic minority entrepreneurs.
Calls for SME finance legislation within Parliament: what’s next?
Against this backdrop, recent Parliamentary discourse suggest that SME finance could become an area of increasing Government focus.
Labour backbenchers have introduced a bill that would require UK banks to expand lending to small businesses and low‑income areas. The proposed legislation mirrors the US Community Reinvestment Act, requiring banks to report on their lending rates to underserved communities.
This political momentum, combined with the findings in the Government’s response, underlines the importance of creating a lending landscape that is simpler to navigate, more accessible, and better equipped to support growth amongst small businesses in the UK.
For anyone who would like to discuss particular alternative funding products, please reach out to our Asset Finance and ABL Partner, Natalie Coates.
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