Shift in lending needs for SMEs as caution rises

New figures from UK Finance in its latest Business Finance Review shows an expected slowdown in lending to SMEs following a reduction in applications for finance – particularly loans – in the previous quarter. SMEs’ demand for finance continues to be muted this year as they become more cautious because of the uncertain year ahead.

Gross lending 

The figures from Q3 showed a continued softening in applications for finance from SMEs. Overdraft applications continued to trend up in the third quarter, but demand for loans fell. Gross lending through loans and overdrafts to SMEs edged down to £4.5 billion from £5.1 billion in the previous quarter. In London, this represents the second quarter of declining lending values. The South West also saw a marked drop which could be due to the decline in finance applications from the agricultural sector, which is highly represented in the region.  For other regions of the UK, lending remains stable and similar to pre-pandemic levels.

Meanwhile, overdraft applications represented the highest volume of applications since Q1 2020. This points to cashflow management and working capital requirements rather than business development.

Invoice finance and asset based lending (IF/ABL) 

IF/ABL advances continued to grow and have now surpassed those reported in 2020 Q1, approaching the levels seen in 2018/19. There have now been nine consecutive quarters of growth, with advances at the close of Q3 2022 standing at almost £22 billion.  Data shows that there was strong growth in the number of the clients that are supported, with total client sales up 14 per cent. IF/ABL business continued to have access to funding in existing facilities.


We continue to see relatively modest changes in the aggregate picture across SME cash deposits. At the end of Q3 total deposits fell by just under one per cent compared with three months previous, and by two per cent relative to the same period a year ago.  This does however vary by sector. There has been a somewhat larger drop off in deposits in accommodation and food services, and health and social care. In contrast, cash deposits were higher in construction and real estate.

Stephen Pegge, Managing Director of Commercial Finance, comments: “As the UK economy enters choppier waters, SMEs have become more cautious in their outlook and this is reflected in a more subdued appetite for finance. Demand has, however, been somewhat stronger for products which help with cashflow management, such as overdrafts and, more notably, invoice finance and asset-based lending products. SMEs are however continuing to meet debt repayment obligations on the back of more significant borrowing during the Covid-19 pandemic.

“With the UK economic outlook expected to deteriorate further in the early part of 2023, SME growth plans and investment are likely to remain cautious over the coming quarters. The recent energy support package from government will help businesses manage some of the near-term cost pressures. In addition, data continue to point to a good degree of headroom across existing facilities and deposits. But business that need further finance support, whether that be to manage existing obligations or for new opportunities are encouraged to have an early conversation with their lender.”

The UK Finance Business Finance Review for Q3 is available here.