The British Business Bank’s report for 2024 to 2025 found that challenger and specialist banks reached a record high in lending, providing 60% of the £62.1bn lent to smaller businesses.
However, the report also revealed that the overall number of small businesses accessing finance dropped to 43% by mid-2024 amid challenging economic conditions.
Smaller businesses continued to invest less than larger ones, allocating £12.3bn compared to £27.7bn by bigger companies.
Reasons included high credit costs and risk aversion, with many opting for slower growth over borrowing.
Despite this, short-term credit like credit cards and overdrafts remained popular, although their usage declined slightly.
Environmental sustainability was also a priority, with more businesses planning to use external financing for eco-friendly initiatives.
Equity investment in 2024 mirrored levels seen in 2019 and 2020, with fewer deals but a rise in deal value.
The report also highlighted access difficulties faced by ethnic minority-led businesses, with Black entrepreneurs particularly affected, as 59% found it difficult to secure finance.
Louis Taylor, CEO of the British Business Bank, said: “It is clear that conditions are not easy for smaller businesses, with some domestic uncertainty meaning many were less willing to invest with confidence in 2024.
“If we are to achieve the growth we all want in the UK economy, it is important that we continue to make the case for business investment which can help drive economic growth, lift wages and improve living standards.”
Taylor added: “The diversity of supply of finance, in terms of both product and provider, is an important factor in meeting the diverse needs of the UK’s highly varied smaller business community.
“The increasing role for challenger banks in 2024 is an encouraging sign, as is the continued rise of asset finance.”
He said: “The findings from this report further emphasise the need to ensure smaller businesses across the UK’s Nations and regions have better access to the finance they need to invest.
“We will continue to support UK economic growth by helping them find the capital they need to start up, scale up and stay in the country as they realise their full potential.”
