Loans taken out by SMEs for tax payments, working capital, and debt refinancing have risen significantly, while growth-focused lending has lost ground, new research reveals.
Borrowing to cover tax payments increased 29% year-on-year to £25m in 2025, according to analysis of Funding Circle’s 2025 lending data.
Tax-related lending recorded the strongest increase in average loan size of any borrowing purpose, up 13% year-on-year.
The report said it suggests that “SMEs are not only borrowing for tax liabilities more frequently, but are doing so in larger amounts each time”.
Totalling £533 million, working capital accounted for 37% of all loans, up 17% year-on-year. Refinancing of existing debt saw the sharpest hike, rising by 33% to £88 million.
The study said “this points to a lending environment shaped more by operational necessity than by expansion appetite”.
Expansion remained the largest reason why SMEs borrowed, with £701 million of lending in 2025. However, its share of total lending fell from 50% to 48% year-on-year, which the report said reflects “growing caution around long-term capital investment”.
Total loan values were up 16% against a 10% increase in loan numbers. Average loan sizes rose from approximately £77,000 to around £81,000, a 5% increase that “may reflect both higher borrowing needs and increasing cost pressures across sectors”.
The report concluded: “The data reflects a lending market that is still active and growing, but where the motivations for borrowing are shifting.
“Businesses are increasingly using finance as a cash flow management tool, covering day-to-day operating costs, managing debt, and meeting tax obligations, rather than funding expansion.”