Business dynamism is showing signs of improvement, with 314,000 start-ups created in 2025, up 1% on the previous year, and with a net rise in the overall business population.
External finance remains widely used, with around 50% of smaller businesses using external finance in 2025. Credit cards (19%) and overdrafts (16%) were the most commonly used products in Q3 2025, alongside leasing and hire purchase (13%), reflecting increased use of flexible, short-term finance. This suggests, however, that debt finance is being used for stability rather than growth.
There is an accompanying broader awareness of finance options, with 62% of smaller businesses in 2025 stating they knew where to obtain information on different types of finance, five percentage points higher than in 2024, indicating greater visibility and understanding of the choices available.
Challenger and specialist banks’ market share exceeded big five banks for the fifth consecutive year
A more diverse mix of lenders, products and businesses is reshaping competition, supporting innovation and expanding choice, and the British Business Bank is playing a key role, helping shape the market for lending in the UK as a champion of both challenger banks and alternative lenders.
Challenger and specialist banks accounted for 60% of gross SME bank lending (excluding overdrafts) in 2025, up from 39% in 2012. The growth of non-bank lenders over the past decade means over two thirds (68%) of overall SME lending in 2025 came from either challenger and specialist banks or non-bank lenders.
Since 2013, 28 new providers have entered the smaller business banking market. Of these, 43% are, or have been, British Business Bank delivery partners.
Challenger and specialist banks also continue to play a leading role in technological advancements and have helped facilitate new entrants. Examples of these advancements include ‘bank in a box’, Software as a Service (SaaS), and digital-only finance providers.
AI attracting significant equity investment
AI is attracting a significant share of equity investment. AI companies raised £2.9bn across 323 deals in Q1-Q3 2025, accounting for around two-fifths of total UK equity investment, highlighting a strong investor focus on innovation.
Significant challenges in accessing finance remain for some under-represented groups and geographical areas being tackled directly by the British Business Bank
Ethnic Minority-led businesses show stronger ambition for growth and willingness to use finance. The report found that 71% aim to become significantly larger (vs 40% of White-led businesses), and 52% are willing to use finance to grow (vs 35% of White-led businesses).
However, they are also more likely to anticipate difficulties accessing finance (51% vs 36% of White-led businesses), highlighting persistent barriers for under-represented groups and businesses outside major urban centres.
Businesses located in rural and coastal areas, female and Ethnic Minority-led businesses all face the greatest challenges raising finance. There is positive evidence to suggest that increased diversity of senior decision makers leads to a greater likelihood of diverse founders being able to secure investment.
The British Business Bank has recently put in place interventions to address these challenges, including increased commitments for its Nations and Regions Funds, the Community ENABLE Funding programme and additional resources to support a greater diversity of fund managers and founders.
Louis Taylor, CEO, British Business Bank said: “While economic conditions in 2025 continued to provide challenges for smaller businesses, lending markets are showing signs of positive improvement. Smaller businesses continue to show great resilience and determination to succeed and thrive, creating jobs and investment across the UK, although economic growth will require greater confidence to invest in new capacity and capability.”
“Following the recent Spending Review, we are increasing our annual funded commitments to around £2.5bn – a two-thirds increase – and issuing around £2.1bn annually in guarantees to help even more smaller UK business to start up, scale up and stay in the country to achieve their growth potential.”
