FCA regulation is not a major barrier to SME finance – but challenges remain

The FCA found no evidence that FCA regulation is a major barrier to SME access to finance.  Nonetheless, SMEs face challenges on both the demand side and supply side, including SME preparedness and market navigation, challenges in assessing risk and accessing suitable products, regulatory frictions relating to duplication in customer checks and Consumer Credit Act requirements, and issues relating to commission-based incentives in the alternative lending market and personal guarantee requirements.

SMEs, defined as businesses with fewer than 250 employees and an annual turnover under £44 million, account for 60% of employment and 51% of turnover in the UK private sector.  Despite this economic significance, only 21% of the total value of UK business loans are provided to SMEs, and 54% of SMEs are not using external finance in any capacity; only 6% of UK smaller businesses believe the current provision of credit is sufficient to meet their needs.

Micro and start-up SMEs (fewer than 10 employees) represent 95.5% of all SMEs and are the least likely to use external finance. Among those that had sought finance in the three years to December 2025, only 17% of sole traders and 36% of micro-SMEs borrowed more than £25,000.  Access-to-finance challenges are not evenly distributed across the SME population, with evidence pointing to greater potential frictions for SMEs outside London and the Southeast: London accounts for 61% of UK equity investment value and 47% of equity deals in 2024.

The FCA's review focused on business lending of £25,000 or less to sole traders and small partnerships (but not to limited companies), because this activity falls within the consumer credit regulatory perimeter.  A £20,000 business loan to a sole trader may fall within the regulatory perimeter, whereas the same loan to a limited company would not, and business lending above £25,000 would generally fall outside the perimeter.  Firms must ensure their product governance and compliance frameworks correctly map which products and customer types are in scope.

CCA information and communication requirements, together with sanctions for technical non-compliance, increase the cost and complexity of regulated SME lending. Stakeholders said these requirements can affect the commercial viability of some regulated lending products and may influence firms' willingness to offer them. It also raised concerns about the scope of CCA-regulated business lending and how it fits alongside the wider regulatory framework.  HMT is reforming the CCA 1974 with the stated objective of supporting a modernised and flexible consumer credit market, repealing prescriptive information requirements and associated sanctions, whilst certain rights and protections will be recast into FCA rules. The FCA intends to consult on the key elements of the consumer credit framework, with proposals supported by a cost-benefit analysis.

SMEs may be asked to provide similar information to brokers and multiple lenders during finance applications, increasing processing time and cost, particularly where firms cannot rely on checks undertaken by another party. This may make it harder for SMEs to compare providers and products and, in some cases, discourage them from completing the application process entirely.  UK Finance is supporting banks and building societies to develop a voluntary digital verification service which could help reduce repeated requests for identity information, though the design, practical application and potential coverage of the service are still being developed, and any approach would need to maintain effective financial crime controls.  Firms should monitor developments and engage early given the AML/KYC implications.

Open finance presents a real opportunity to address challenges in SME lending, particularly where limited financial information or credit histories make it difficult for lenders to assess risk. More complete and timely information could reduce application friction, support more informed lending decisions, and help SMEs access more suitable products.  The FCA published its open finance roadmap in April 2026 and a discussion paper outlining options for a first open finance scheme framework, with SME lending as one of two prioritised use cases, is expected in early 2027, with a Government consultation on open finance also planned for 2027.

Microbusinesses whose applications are declined by a bank may seek finance from alternative lenders via unregulated brokers. Limited transparency and commission-based incentives for those brokers may, in some cases, steer micro-SMEs towards high-cost, short-term products that are not well suited to their needs and this lending generally falls outside the FCA's perimeter.  Personal guarantee requirements can be a significant barrier to seeking finance and are commonly required where businesses lack collateral, including in the service sector and among newer firms.  Regulated firms with referral or introducer relationships with unregulated brokers should review those arrangements carefully.

Some entrepreneurs, including women, ethnic minorities, disabled entrepreneurs, and those operating in deprived areas, face persistent and disproportionate challenges in navigating the business landscape and securing suitable lending.  Despite the growing economic importance of intangible investment, mainstream lending practices often do not reflect the value of intellectual property and intangible assets (such as copyright, patents or trademarks) as collateral, making finance harder or more costly to obtain for asset-light and intangible-led businesses.  Firms should consider whether their underwriting criteria and credit policies adequately account for these issues, including under Consumer Duty.