SME lending trends indicate gradual return to normal

14th June 2022

UK Finance’s latest Business Finance Review has indicated a gradual return to normal lending trends across SMEs during the first quarter of 2022.

The research found a modest uptick in demand for cashflow finance through overdrafts and invoice finance and asset-based lending – as a consequence of both the end of Covid-19 restrictions and the significant increase in cost pressures that many businesses are now facing.

Following the significant growth in lending volumes in 2020/21 from the government’s Covid-19 lending schemes, demand for finance has been comparatively muted over the past year with gross lending of around £5 billion per quarter from the high street banks covered in our sample.

During the first quarter of 2022 gross lending to SMEs was £4.9 billion, £0.1 billion higher than the previous quarter.

Following two years of very subdued demand for overdrafts, this quarter saw the first material increase in approvals, up 23 per cent compared with the previous quarter. However, as the chart below illustrates, this growth still leaves demand far below pre-pandemic trends.

SMEs are continuing to meet their government lending scheme repayment obligations. The steady flow of repayments of government-backed lending is encouraging and feedback suggests that, while there are some businesses falling behind, payment problems are currently not as prominent as many had initially feared.

Stephen Pegge, Managing Director of Commercial Finance, said “Activity across the economy continued to expand at the start of the year, but SMEs were beginning to face a pick-up in economic headwinds. While concerns about household finances have been making headlines, many businesses are also dealing with sharply rising input costs and more uncertainty about the demand outlook.”

“Nevertheless, finance usage and demand by SMEs shifted little in the early months of 2022. Overall lending has been broadly stable, but there has been a modest pick-up in new overdraft approvals and utilisation in addition to continued growth in invoice finance and asset-based lending advances. This is likely a response to the now complete reopening of all parts of the economy as well as the increase in cost pressures.”

“Our data continues to show that SMEs are meeting repayments of government-backed loans, accessed during the pandemic, but this has not significantly dented the financial headroom available through deposits and flex in other arrangements.”

Gross lending to SMEs through loans and overdrafts

Gross lending to SMEs through loans and overdrafts

Number of approved overdraft applications

Number of approved overdraft applications.svg