Our analysis of Bank of England data shows that the value of bank loans to UK SMEs decreased by £14bn in the last year, falling from £209bn to £195bn. This comes as banks grow increasingly keen to protect themselves against rising default rates.

When interest rates began to rise, banks started to rein in lending to higher risk borrowers like SMEs. However, loans to large businesses have increased by £14.7bn, rising from £322.1bn to £336.8bn in the same period (see graph below).

Banks were already reducing their lending to small businesses over the past few years, as is often seen in times of economic stress, but the collapse of Credit Suisse and SVB has made many banks even more wary of dealing with risky borrowers.

Those businesses with outstanding debts should also be particularly careful of breaching the terms of their loan agreements, as some loans stipulate that a businesses’ borrowing costs cannot exceed a specified percentage of profits. In these cases, a drop in business revenue due to weaker economic conditions and the sharp increase in the Bank of England base rate over the last 12 months from 0.75% to 4.25%, which increased borrowing costs for businesses with floating rate debt, would make a breach more likely. A lender may have the right to demand immediate repayment of a loan if their loan agreement terms are breached.

An additional threat to small business lending is a plan to reform bank capital rules within the UK, which could lead to a reduction of SME lending by 25%. Published in December 2022, the Prudential Regulation Authority’s plan removes a key incentive for banks to lend to SMEs. This could result in a significant cut to SME lending between 2024 and 2026, according to economics consultancy Oxera.

As banks get more concerned about the financial climate, banks are likely to consider tightening lending criteria and focusing more sharply on borrowers that are at or near covenant limits. This could make it challenging for businesses to secure the financing they need to grow.

We recommend that SMEs seeking funding look at all of the potential sources, including alternative lenders, as bank lending to small businesses further deteriorates. As financing becomes more difficult to obtain, it’s essential that SMEs seek professional advice to find the best options for their business.

ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands on support from day one all the way through to drawdown.

To learn more, please get in touch at theteam@altenburgadvisory.com.