Challenger and specialist banks’ share of gross lending is the highest on record – accounting for 60% and outperforming the UK’s big five banks, according to the British Business Bank’s Small Business Finance Markets 2024/25 report.

The report also finds that business investment by smaller businesses continued to be low, a key reason for the lag in UK productivity versus other G7 countries.

Of the £62.1bn of gross lending to smaller businesses in 2024, £37.3bn was provided by challenger and specialist banks. Their share of gross lending (60%) exceeded that of the big five UK banks for the fourth year in a row, up from 59% in 2023 and the highest on record.

The proportion of smaller businesses accessing finance fell from 50% in Q3 of 2023 to 43% in Q2 of 2024, most likely due to business confidence remaining low despite some recent economic growth. This reflects a challenging economic environment in the UK – 2024 saw growth in the UK at 0.9%, but GDP level was only 3.2% above the pre-pandemic level in 2019 (the second lowest in the G7).

The report also finds that smaller businesses generally invest less than larger businesses relative to their turnover. In 2024, smaller businesses invested an estimated £12.3bn, while larger businesses invested 2.25 times as much (£27.7bn), despite larger businesses contributing slightly less turnover to the economy (48%) than smaller businesses (52%).

Reasons for this lower level of investment include a general lack of capital, and investors having less information and certainty about smaller businesses, which leads to higher borrowing costs.

Investment in the UK has also been low historically, with investment growth slower post-global financial crisis. This is a key reason for the country’s productivity lag compared to, for example, Germany and France.

The report finds that smaller businesses who believed they have underinvested most commonly cited ‘credit being too expensive’ (58%), or that they ‘could not borrow at a reasonable rate’ (55%) as key factors for not investing in their business.

77% agreed that they would accept a slower growth rate rather than borrowing to grow, with only 7% disagreeing, suggesting a strong aversion to taking on debt for investment.

Louis Taylor, CEO, British Business Bank, said: “It is clear that conditions are not easy for smaller businesses, with some domestic uncertainty meaning many were less willing to invest with confidence in 2024.

“If we are to achieve the growth we all want in the UK economy, it is important that we continue to make the case for business investment which can help drive economic growth, lift wages and improve living standards.

“The diversity of supply of finance, in terms of both product and provider, is an important factor in meeting the diverse needs of the UK’s highly varied smaller business community. The increasing role for challenger banks in 2024 is an encouraging sign, as is the continued rise of asset finance.

“The findings from this report further emphasise the need to ensure smaller businesses across the UK’s Nations and regions have better access to the finance they need to invest. We will continue to support UK economic growth by helping them find the capital they need to start up, scale up and stay in the country as they realise their full potential.”