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Deep Dive: Growth Funding For Your Business

Deep Dive: Growth Funding For Your Business

Everything you need to know about raising capital to scale, invest and succeed

 

For ambitious SMEs, the path to growth often depends on access to the right funding at the right time. Whether you are scaling operations, acquiring new equipment, hiring talent or entering new markets, your funding strategy must be carefully aligned to your business plan.

In this second instalment of our white paper mini-series, we explore the funding landscape for growth and expansion. Drawing on Pegasus Funding Solutions’ insights across a wide network of lenders and investors, we offer a practical guide to help you make informed choices in 2025 and beyond.

Growth Funding: The Core of UK Business Finance

Around 80% of UK business funding activity is focused on supporting expansion, making this the most common and most competitive area of SME finance. The challenge is not just access, but choosing the right mechanism. Growth capital now comes from a diverse ecosystem that includes traditional banks, private equity, alternative lenders and fintech platforms.

“The market for growth funding is broad, but not always transparent. The most successful businesses are those that plan ahead, present well and explore more than one route to capital.”

– Rich Olsen, Director, Pegasus Funding Solutions

Here, we take a closer look at the options.

Traditional Bank Lending: Stabilising, but Selective

Term Loans, Overdrafts and Credit Facilities

Despite the growth of alternative finance, conventional bank loans remain a cornerstone for many SMEs, particularly those with a strong trading history and tangible assets.

After a sharp contraction in 2023, bank lending showed signs of stabilisation in 2024, with major UK banks approving around £4 billion in new SME loans per quarter. This was a modest improvement over 2023 and reflected a cautious return of appetite in the lending sector.

However, demand remained subdued. The total stock of outstanding SME bank loans stood at £185 billion in 2023. This was 12% lower in real terms than in 2022, reflecting both repayments and a slowdown in new borrowing.

With interest rates peaking at 5.25% in 2024, many businesses chose to defer expansion or self-fund using retained profits. As base rates begin to ease in 2025, a modest recovery in loan demand is expected.

Credit Criteria Have Tightened

Banks remain highly risk-sensitive. Sectors such as hospitality, retail and construction face tougher scrutiny. Even in core sectors, businesses must demonstrate robust cash flow, clear repayment capacity and well-prepared financial forecasts.

A recent parliamentary committee found that approval rates for SME loans are still below pre-pandemic levels. Many businesses are “discouraged” from applying due to perceived barriers or fear of rejection.

To counter this, the Bank Referral Scheme requires banks to refer rejected applicants to alternative platforms. Consultations are underway in 2025 to strengthen this scheme and improve transparency in lending decisions.

Regulatory Balance

Upcoming international banking rules (Basel 3.1) initially raised concerns about a reduction in SME lending, due to higher capital requirements. The UK’s Prudential Regulation Authority has since confirmed it will maintain current requirements for SME lending, avoiding a regulatory squeeze. This is a positive step for bank-funded growth.

Asset-Based Lending: Flexible Finance for Expansion

Asset finance, including hire purchase, leasing and invoice finance, continues to grow as a tool for expansion.

According to the Finance & Leasing Association, total new asset finance volumes rose 4% year-on-year to October 2024, driven by demand for commercial vehicles, equipment and fleet upgrades.

However, growth was uneven. Larger corporates increased their asset finance borrowing by around 8%, while SME usage rose by just 1%. This suggests SMEs either remain cautious or are unaware of available capacity.

Invoice finance and factoring also saw modest increases, particularly among mid-sized firms using receivables to improve liquidity. Many SMEs still hold untapped potential in these facilities, which can be valuable when working capital is stretched.

The Rise of Alternative and Fintech Lenders

With banks maintaining stricter criteria, non-bank lenders are playing an increasingly important role in SME growth finance.

Fintech platforms, challenger banks and private credit funds offer speed, flexibility and more data-driven underwriting. These lenders often specialise in particular sectors or asset classes and are more open to businesses without long trading histories.

Many provide revenue-based financing, where repayments flex with income.  They may also offer unsecured short-term facilities that are well-suited to fast-moving projects or bridging needs.

Specialist Funding for Mid-Market Growth

Larger SMEs and mid-sized businesses (£10 million+ turnover) have access to more sophisticated financing options, including:

These options typically require stronger governance, board-level reporting and a clear growth strategy but they offer significant firepower for ambitious companies.

Sector and Risk Considerations

Growth funding is not equally available across all sectors. In 2025, lenders and investors are favouring:

By contrast, sectors with low margins, seasonal demand or exposure to consumer volatility may face higher borrowing costs or lower approval rates.

Key Takeaways for SME Leaders

If you’re planning to raise growth funding in 2025:

Start early: expect longer lead times, especially with banks or multi-party deals

Prepare your case:  strong cash flow, clear business plans and robust financials are critical

Explore blended finance: combine traditional debt, fintech lending and asset finance to spread risk and improve cash flow flexibility

Use external support: specialist advice can improve your chances of success, especially for complex or strategic funding requirements.

What’s Next?

In our next report, we explore the role of private equity and venture capital in SME funding, including how to assess whether equity finance is right for your business.

Get Expert Support

If you are considering growth finance, contact Pegasus Funding Solutions for an initial consultation. We’ll help you clarify your objectives, assess your options, and engage the right lenders or investors for your next stage of growth.

Call: 0203 327 0567

Email: [email protected]

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