New lending data from Funding Circle points to a structural shift in how UK small businesses are using external finance, with borrowing for tax payments, working capital, and debt refinancing all rising significantly, while growth-focused lending loses ground.
The findings carry practical implications for accountants and finance professionals advising SME clients, as more businesses turn to credit to manage cash flow timing pressures rather than to fund long-term investment.
Tax-related borrowing is rising, and loan sizes are growing with it
Borrowing to cover tax payments increased 29% year-on-year to £25m in 2025. Notably, tax-related lending also recorded the strongest increase in average loan size of any borrowing purpose, up 13% year-on-year. This suggests that SMEs are not only borrowing for tax liabilities more frequently, but are doing so in larger amounts each time.
The trend is consistent with broader fiscal drag effects and cash flow timing pressures, where the gap between when a liability falls due and when cash is available to meet it is increasingly being bridged through external finance.
Working capital and refinancing are driving overall lending growth
Expansion remains the single largest reason SMEs borrow, with £701m in lending in 2025. However, its share of total lending has fallen from 50% to 48% year-on-year, reflecting growing caution around long-term capital investment.
Working capital now accounts for 37% of all loans, with £533m borrowed for this purpose in 2025, up 17% year-on-year. Refinancing of existing debt has seen the sharpest rise, up 33% to £88m. Together, these figures point to a lending environment shaped more by operational necessity than by expansion appetite.
The overall market is still growing, with total loan values up 16% year-on-year against a 10% increase in loan numbers. This implies that average loan sizes are rising, from approximately £77k per loan to around £81k, a 5% increase that may reflect both higher borrowing needs and increasing cost pressures across sectors.
Sector trends: construction and logistics lead, consumer-facing sectors lag
Property and Construction recorded the strongest sector growth, up 30% year-on-year, likely driven by ongoing development activity, refinancing within the sector, and expectations of more stable interest rates. Higher average loan sizes in this sector may also reflect rising input and materials costs.
Consumer Services (+46%), Wholesale (+40%), and Automotive (+22%) all showed strong growth, indicating resilience in parts of the supply chain. In contrast, more discretionary sectors such as Leisure and Hospitality (-1%) and Arts and Entertainment (-2%) remained flat or slightly down, consistent with ongoing household spending caution.
Regional lending: growth is decentralising away from London
Greater London remains the UK’s largest SME lending market, with £295m in 2025, but its year-on-year growth in both loan numbers (+7%) and values (+12%) sits below the national average. The fastest growth is coming from elsewhere: Northern Ireland saw lending value rise 47% year-on-year, followed by the North East (+22%), the North West (+21%), Scotland (+20%), and the South East (+19%).
| Region | Number YoY | Value YoY |
|---|---|---|
| Greater London | +7% | +12% |
| South East | +11% | +19% |
| North West | +10% | +21% |
| East of England | +9% | +18% |
| South West | +11% | +11% |
| West Midlands | +9% | +11% |
| East Midlands | +8% | +17% |
| North East | +19% | +22% |
| Scotland | +12% | +20% |
| Wales | +16% | +16% |
| Northern Ireland | +16% | +47% |
What this means for SME clients
The data reflects a lending market that is still active and growing, but where the motivations for borrowing are shifting. Businesses are increasingly using finance as a cash flow management tool, covering day-to-day operating costs, managing debt, and meeting tax obligations, rather than funding expansion.
For accountants and finance professionals, this trend underscores the value of proactive conversations with SME clients around cash flow planning, tax payment timing, and when short-term borrowing makes financial sense. As average loan sizes grow and refinancing activity increases, understanding a client’s existing debt profile will be increasingly relevant to broader financial planning advice.