SME lending prospects will strengthen going into 2025

Now, overall confidence can return so companies can start to enjoy the relative stability after the press frenzy of speculation and, hopefully, the potential upturn.

The latest EY Item Club outlook predicts good news in a return to bank lending growth, which should accelerate into 2025 and 2026, which is a relief following a -2.2% net contraction in bank financing last year. Business consultancy EY forecasts that total bank loans to UK households and businesses will grow 2.6% (net) this year, 3.7% (net) in 2025 and 4.3% (net) in 2026.

However, an important proviso is that this prediction relies heavily on inflation and interest rates continuing to fall, which all UK market commentators suggest will happen, barring any more global events like Ukraine or the pandemic to throw us off course.

But for now, the better news for small businesses and commercial brokers is that the UK economy is projected to deliver steady growth over the next two years of 1.5% in 2025 and 1.6% in 2026. This economic recovery is expected to feed through to the banking sector as interest rates fall and appetite to borrow strengthens over time.

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First Labour Budget in 14 years

Despite fears and the reported £22bn fiscal black hole the government needed to fill, there were positives for small business.

The government’s Corporate Tax Roadmap, capping the headline rate at 25% and maintaining key investment reliefs, might encourage businesses to start looking for funding for longer-term investments.

The retail, hospitality and leisure sectors also had some reasonable news on business rates as the small business multiplier will be frozen for 2025-26, and retail, hospitality, and leisure businesses will receive a 40% discount on their bills, up to a maximum of £110,000. This replaces the current 75% discount, due to expire in April 2025. However, this could be outweighed by the increases in employers’ National Insurance (NI) and the National Minimum Wage increase, depending on the business.

But in the same way buyers are returning to the UK housing market, post-Budget confidence may encourage the businesses stalling to ‘wait and see’ to seek finance for growth.

Broker opportunities in 2025

Commercial brokers should be able to see the upswing this year at a revenue level if they haven’t already. The rate cuts in August and November boosted the UK’s economic confidence, and according to EY, bank lending to businesses is also forecast to grow by 5.6% in 2025, up from 3.1% in 2024.

The continued gradual interest rate cuts this year will increase SMEs’ appetites to borrow. Where high commercial mortgage lending rates punished the buy-to-let (BTL) market and led to a business contraction in 2023, notwithstanding the recent post-Budget increase in gilt/swap rates, those rates are expected to become more competitive now.

And the customer demand is coming, if it’s not already out there, according to a Bayes Business School report (formerly Cass), which suggested £170bn of loans will need to be refinanced in the next 12 months.

The huge optimism of the finance brokers themselves, with 73% of brokers feeling optimistic about the future, appears to be justified right now, according to a survey by SME lender Iwoca.

The question is: can brokers turn that optimism into growth-driven completions, converting a good 2025 into a great one?