Business lending expected to increase at highest rate since 2020

A new EY ITEM Club forecast has predicted bank-to-business lending growth to increase from 2.9% in 2024 to 4.5% in 2025 – the highest rate since 2020 – and 5.6% in 2026 as borrowing rates continue to fall 

Bank lending to UK businesses grew by 2.9% in 2024, as falling interest rates boosted market confidence in the second half of the year. Businesses borrowing was primarily driven by large firms, with loans to corporates increasing 3.9% (net) year-on-year in the twelve months to December 2024, while loans to SMEs contracted -1.9% (net) year-on-year to December 2024, as smaller firms continued to focus on repaying Covid-19 loans. 

Looking ahead, demand for business loans is expected to rise as interest rates and borrowing costs continue to fall. As a result, the EY ITEM Club forecasts UK bank-to-business lending to grow 4.5% (net) this year – the strongest growth since 2020 when the Government announced loan support schemes during Covid-19. However, the 4.5% (net) expectation is a downgrade from the 5.6% (net) again a previous forecast, downgraded due to upcoming tax changes, tighter financial conditions and global trade uncertainty being expected to weigh on private sector confidence and investment in the first half of 2025. 

If interest rates continue to gradually fall as expected, it is forecasted that bank-to-business lending to grow by 5.6% (net) in 2026 and 6.0% (net) in 2027.  

Write-off rates on loans to UK businesses are expected to remain low at 0.17% in 2025, 2026 and 2027 (in line with 0.17% in 2024), as corporate balance sheets remain healthy and debt interest costs lower. 

Dan Cooper, EY UK Head of Banking and Capital Markets, said “There is no doubt that the macroeconomic climate of the past few years has been difficult for UK businesses and households, and this has an impact on the banks that support them. Looking to the year ahead, the increasingly positive outlook for lending and the prospect of relatively low default rates is welcome news for UK banks and their customers. While it’s important to remember that these growth rates are still a way off record-highs of past years, this forecast should provide a boost to banks’ balance sheets and provide some breathing space to focus on executing wider strategic priorities such as transformation and embracing new technologies.”