The SME Funding Crisis - Part 2: How Banks Betray Job-Creating SMEs

1 in 2 Loan applications are rejected This 50% rejection rate represents a dramatic decline from the 80% success rate recorded in 2018 and highlights a growing crisis in SME access to finance.

Businesses need funding most when they're starting and growing, precisely when banks refuse to provide it and this is typified by Government's failure to provide sufficient funding to the British Business Bank. The bank is wholly owned and funded by the UK government, specifically through the Department for Business and Trade and was established in 2014 to solve this market failure. However, the bank’s new, five-year strategic plan only aims to fund, for example, around 180,000 (c36,000 p.a.) SMEs over the next 5 years including 85,000 startups. Those funded will be mainly innovative, technology-focused companies which is great, but what about those in traditional sectors - retailers; construction; manufacturers etc? Most of these are not innovative and will be ignored.

Further, there are 5.6 million existing SMEs plus over 800,000 new businesses established every year. Many of these will seek loans over the years to come and funding for just 180,000 doesn’t scratch the surface of what is needed.

Help for SMEs to become "loan-ready" is inadequate Instead of helping applicants become loan-ready by assessing their business plan, identifying weaknesses and advising how to rectify them etc, most banks simply reject even though research suggests that around 65% of declined loan applications are "readily fixable".

It is therefore no surprise that two-thirds of adults considering starting their own business, don't go ahead because of the fear of funding rejection.  Research from Small Business Economics also demonstrates that 72% say that a past rejection has deterred them from applying for finance again.

Even those that are innovative can't get loans. For example, Innovate UK provided less than 30% of it's available funding in 2025. According to a Venturenomix FOI request, the Innovate UK loans team had a £100m budget across 4 competitions but only awarded £28.3m in funding.

Over the 4 competitions that ran in 2025, the loans team received 727 applications of which 474 applications were ‘in scope’ (meaning conversely that 35% were not assessed at all). 304 applications passed the threshold for innovation (and were passed to the credit team for further assessment) but only 17 applicants were eventually awarded loan funding - a 2.3% overall success rate.

The total underspend of £71.7m is indefensible in a climate where funding for innovative SMEs is at an all-time low. The £100m should have been deployed in full; it would have been if the fund were privately managed. Added to this, Innovate UK takes 4 months or more to make a decision - way too long. Tech startups in the fast-paced world of developing innovative products, processes and services cannot afford to wait this long for a lending decision.

Bank requirements for collateral stops 000s SMEs applying It is estimated that around £4 billion worth of debt applications are rejected annually, not because the ideas lacks merit, not because their business model is flawed, but because the business owners are unwilling or unable to provide a personal guarantee and/or property or equipment as collateral.

Some lenders only ask for a personal guarantee and advertise their loans as unsecured. This should not be allowed - in the event of default, the guarantee is usually called. Most banks also insist startup loans are taken out in the owner's personal name rather than the business entity, despite the business being the actual borrower and user of funds. These administrative sleights of hand provide banks with security while burdening entrepreneurs with personal liability for business debts.

Even under the UK's Growth Guarantee Scheme with 70% of the loan guaranteed by the Government, borrowers remain 100% liable for the debt. This Kafkaesque arrangement discourages entrepreneurship and penalises those brave enough to try. It shifts all risk onto the entrepreneur while banks enjoys the upside of interest payments with minimal exposure. For the business owner, it transforms a new, venture into a potentially life-ruining gamble.

Meanwhile, venture capitalists and angel investors are writing cheques worth millions based on nothing more than a compelling pitch, a credible founding team and a market opportunity. No collateral. No assets pledged. No personal guarantee. Just potential.

Why are banks still anchored to a collateral-first approach when the investing world has long since moved on? There is a compelling economic and social case for banks to dramatically increase their unsecured lending to startups and SMEs modelled on the investor mindset. However, banks’ collectively take the easy way out. They will lend potentially £ millions on an unsecured basis to a large company, employing teams of analysts to assess credit risk but when it comes to SMEs seeking only £000s, they are risk averse and the easy way out for them is to request security. This can and must change. Next: The Grant Mirage: Why Public Funding Offers False Hope