Lenders are already easing off the accelerator
Real estate firms accounted for much of the growth in SME borrowing from the main high street banks in the second quarter of 2026, taking gross lending to a post-pandemic high of £5.35 billion while manufacturers and hospitality firms borrowed less, according to UK Finance.
The trade body's Business Finance Review found real estate and professional services, mainly the former, did much of the lifting in Q2, with health and agriculture also contributing.
Gross lending was more than 26% above the same quarter of 2025, the fastest annual rise since the recovery began in early 2024 and the tenth consecutive year-on-year increase.
Property's growing share
Bank of England figures show SME loans have fallen from 12% of GDP in 2011 to 6.5% in 2026, while real estate SMEs now account for 51% of all loans to small businesses, compared with 39% a decade ago.
UK Finance also found that, in real terms, lending by the main banks in the first half of 2026 was still a third below the 2019 average.
Outstanding high street SME loans and overdrafts across Great Britain dropped 30%, from £89.5 billion in the second half of 2022 to £62.6 billion at the end of 2025, according to analysis of UK Finance data by money.co.uk. That left outstanding lending 14.5% below its pre-pandemic level of £73.3 billion.
Beyond the high street
UK Finance's figures cover the main high street lenders only. The British Business Bank found challenger and specialist banks accounted for 60% of gross SME bank lending in 2025, up from 39% in 2012, while total gross SME bank lending rose 9% to £68 billion.
Members of the National Association of Commercial Finance Brokers arranged £33 billion of SME lending in 2025, up 25% on the previous year. The association estimates its members account for close to two-thirds of broker-originated SME lending, implying a total market of around £50 billion a year.
Semi-commercial mortgage lending rose 20% year on year to £242 million in Q2, according to TAB's Mixed-Use Mortgage Monitor. Bridging Trends recorded gross contributor lending of £173.1 million in Q2, down 15% on Q1.
Property credit growth slows
In the Bank of England's Q2 Credit Conditions Survey, lenders reported that credit availability to commercial real estate increased slightly in Q2, at a slower pace than in Q1, and expected it to be broadly unchanged in Q3.
Lenders also cited commercial real estate as a factor reducing corporate credit demand, and expected demand for buy-to-let lending to fall in Q3.
The RICS UK Commercial Property Monitor for Q2 recorded occupier demand at a net balance of -5%, its least negative reading since Q2 2025. Investment enquiries improved to -8% from -11%.
Trading firms pull back
Gross lending to manufacturers and hospitality businesses in the first half was 6% and 1.5% lower than a year earlier, respectively.
Medium-sized firms in manufacturing, hospitality and construction also borrowed less in Q2, while lending growth to transport and storage and to wholesale and retail slowed but stayed positive.
Overdraft utilisation reached 51.4% in June, the highest level since March 2020, and was up on a year earlier across all sectors.
Hospitality, transport and construction firms also drew more heavily on cash deposits, and UK Finance said hospitality and construction may see their headroom further eroded in the coming quarters.
Conflict dents demand
UK Finance said there were signs the Middle East conflict dampened confidence, with loan and overdraft applications both turning at the end of Q1 and loan applications falling more steeply. The value of loan applications from medium-sized firms fell 40% between March and April.
SME loan application volumes rose slightly in June when US-Iran talks pointed towards a possible ceasefire. UK Finance said this showed the effect geopolitical tensions have on confidence.
New lending peaked around the turn of the quarter and slowed when tensions escalated in April and May.
Smaller firms felt the sharpest impact, although their Q2 lending was still above a year earlier, while lending to medium-sized firms kept growing year on year but weakened in May and June.
Approval numbers stayed above year-ago levels for both size bands, although growth slowed from the start of the year except for small-firm overdrafts.
Borrowing costs climb
The effective interest rate on new bank loans to SMEs has risen from 6.11% in March to 6.36% in June and 6.61% in July, according to Bank of England data.
UK Finance said the lending data was consistent with first-half economic growth, with GDP up 0.4% in Q2 after 0.6% in Q1.
The Monetary Policy Committee voted 6-3 in September to hold Bank Rate at 3.75%, with three members backing a rise to 4%. The Bank expects CPI inflation, which was 3.1% in August, to reach around 3.75% in the fourth quarter and slightly above 4% in early 2027, based on energy prices in mid-September.
According to the minutes, the UK short-term interest rate curve had risen further and peaked at around 4.9% by the end of 2027. The quoted rate on two-year fixed-rate mortgages was around 95 basis points higher than before the conflict.
Government data cited in the review showed 32% of Bounce Back Loans had been fully repaid by June 2026, up from 19% in the previous quarter.
UK Finance said overall demand for finance held up across the first two quarters despite the conflict, but businesses may take a more cautious approach while inflationary pressures continue. The autumn Budget is due at the end of October.
David Raw, managing director of commercial finance at UK Finance, said that with geopolitical tension continuing, "small businesses' confidence inevitably took a bigger hit".
He added that the more cautious outlook across the sector showed the uncertainty firms face going forward and the effect this has on SME lending.
