When good businesses stop looking bankable

Given the recent spell of record breaking weather, there’s been a familiar pattern in how quickly people swing from saying “we never get weather like this” to complaining that it’s suddenly too hot, before the rain returns and everyone starts missing the sunshine again.

At times, parts of the SME lending market can fall into a similar habit of reacting quite strongly to whatever is happening in the moment. Certain themes or concerns can become embedded quickly in the wider market narrative, sometimes before there’s been enough time to properly separate temporary conditions from longer-term structural change.

Research from Boston Consulting Group recently showed British bank lending to non-financial companies fell to 59% of UK GDP in the third quarter of 2025, the lowest level since 1998. Alongside that, in its December 2025 Financial Stability Report, Bank of England data shows the stock of SME debt as a share of UK GDP has fallen significantly over the past 15 years, declining from 13% in 2011 to 8% in 2024.

Now, at surface level, that tells a fairly succinct story about shrinking lending appetite. Dig a little deeper, however, and I think it reflects something wider. For me, it feels as though parts of the market have become less comfortable dealing with businesses that sit outside simplified lending models, even where the fundamentals themselves remain perfectly solid.

And that’s the important distinction.

If you look at live SME cases, you’ll realise that many strong businesses aren’t especially tidy. They might operate across multiple entities, or have cash flow that moves unevenly through the year. None of that automatically makes them poor quality borrowers, it often just means they require a bit more judgement and a few more conversations at the outset.

From our perspective at LHV Bank, some of the most interesting cases are usually the ones where the conversation moves beyond leverage or pricing fairly quickly and into wider commercial plans.

A borrower might be restructuring a portfolio, refinancing to create breathing space for future investment, or purchasing trading premises after years of renting because they want greater long-term stability. And these are often entirely sensible business decisions when viewed in context.

Naturally, you can understand why parts of the market have become more cautious. To put it mildly, SME lending is resource heavy. The cases that come across our desks are often layered, structures can become complex over time, and regulation has undoubtedly pushed lenders towards greater consistency around underwriting.

At the same time, there’s a noticeable difference between businesses that are genuinely high risk and businesses that simply take longer to understand properly. Those two things are not always separated clearly enough, even though the impact spreads far beyond the lending itself.

When access to capital tightens, businesses delay acquisitions, recruitment slows, investment gets postponed, and expansion plans become more defensive. The long-term effect isn’t usually felt all at once, it happens gradually through reduced activity and slower growth over time, which is what is playing out.

Ironically, many SMEs today are arguably more commercially disciplined than they were several years ago. Owners have adapted through inflation, higher operating costs, and rate volatility, often becoming far more forensic in how they manage cash flow and investment decisions.

Yet despite that, more businesses appear to be finding themselves stuck in a strange middle ground where the fundamentals still make sense, but the structure no longer fits comfortably enough.

For lenders, relationship-led lending becomes increasingly important in that sort of environment, not because it means softer underwriting, but because it allows for more informed underwriting.

Good lending will always require discipline, probably more so than before. But it also requires the ability to understand context, borrower strategy, and what the business is actually trying to achieve over the longer term.

The UK hasn’t stopped producing ambitious or well-run businesses. If anything, many have become sharper operators through necessity. As we look to the future, the question is whether the wider lending market still has the confidence, flexibility, and expertise to support them.