A £90 billion “lending gap” in the UK’s banking system is restricting investment, productivity and economic growth by depriving small and medium-sized businesses of vital finance, new research has warned.
A report by Allica Bank, a specialist business lender, has found that a persistent credit shortfall has emerged over the past four decades, with bank lending to SMEs falling dramatically below historic trends. The study suggests that a heavy shift towards low-risk, property-backed lending has created a dysfunctional finance market, leaving many service-based businesses unable to access the funds they need to grow.
According to Allica, SME lending today is £90 billion lower than if it had maintained the levels recorded between 1997 and 2004. Growth in non-bank finance has helped to close part of the gap, but a “substantial” £65 billion credit shortfall still remains.
One of the clearest signs of the shift is the collapse in overdraft provision for small companies. In 1998, overdrafts accounted for 31 per cent of SME bank lending; today, they make up just 5 per cent. Instead, lending has become increasingly concentrated on commercial loans secured against assets—usually property—leaving businesses without tangible collateral struggling to borrow for investment or working capital.
The UK’s economic transition towards a service-led model has exacerbated the problem, with many modern SMEs owning few physical assets. Thin loan margins and regulatory pressures have further pushed banks towards highly secured, low-risk lending practices.
The consequences for economic dynamism are serious. A Bank of England survey earlier this year found that 77 per cent of SMEs would prefer to accept slower growth rather than take on borrowing to expand. Allica’s report warns that this risk aversion, shaped by an unresponsive finance market, is curbing productivity improvements and holding back the government’s broader growth ambitions.
“There is a real need for a reboot of the UK’s SME finance market if we want to address the government’s growth mission,” said Richard Davies, chief executive of Allica Bank. “Record low levels of SMEs are seeking finance. The UK stands out as an outlier, both against our historic lending application rates in the 1980s and 1990s and against international comparator countries.”
Davies said the current lending model, which revolves heavily around real estate collateral, is fundamentally mismatched with the realities of Britain’s modern economy. “The result is a very low rate of SMEs taking ‘productive credit’ to invest in improving productivity and growing their business. We must break out of the long-term cycle we’ve found ourselves in. Established SMEs are the critical force in driving the next wave of economic renewal.”
To address the issue, Davies has called for a rethinking of the regulatory framework, urging the Bank of England to place greater emphasis on SME finance and ensure that regulatory requirements do not unnecessarily inhibit lending by smaller banks and challenger institutions.
Without reforms, Allica warns, the UK risks continuing to suppress the investment and growth potential of a vital sector—at a time when fresh economic momentum is urgently needed.
