State of UK Business Funding in 2025

The Long Read

At Pegasus Funding Solutions, we work closely with SME leaders across the UK to help them access the right capital for their ambitions.

As a funding partner with access to over 600 sources, we see first-hand how the funding landscape is evolving. We also know what that means for businesses trying to grow, adapt or survive.

In this special report, we share our view on the current state of business finance in the UK, with a particular focus on growth and expansion funding. This paper is the first in a three-part series designed to help SMEs navigate the opportunities and challenges in today’s funding market. Future instalments will explore alternative and innovative funding, as well as strategies for survival and turnaround.

Room for Optimism?

The UK business funding landscape in 2025 is cautiously optimistic. While economic pressures persist, there are signs of stabilisation and opportunity. The aftermath of the pandemic, combined with inflationary pressures, labour cost increases and supply chain challenges, has made securing finance more complex, but not impossible.

Bank lending is steady, if conservative. Non-bank finance is growing in influence. Government-backed schemes remain active. The challenge for SMEs is not the absence of funding, but knowing where to look, how to qualify, and how to structure their funding needs in a way that aligns with today’s market expectations.

Key Trends Shaping SME Finance

Rising Costs and Tighter Lending

High inflation and interest rates in 2023–24 drove up borrowing costs and triggered tighter credit conditions. The average interest rate on new SME loans from banks peaked at around 7.6% in mid-2024, a dramatic rise from near-historic lows of under 2% in 2020. This sharp increase has led many businesses to hold off on taking on new debt and has made lenders more selective in their approvals.

Input Costs Remain High

Manufacturers and asset-intensive sectors are still under pressure. Input prices remain approximately 27% higher than in early 2021, despite some recent easing. This continues to squeeze working capital and reduce headroom for investment.

Fragile Cash Flow

Surveys show only a modest net balance of firms reporting improved cash flow in recent quarters. This is typically between +2% and +4%, compared to pre-pandemic averages of around +10%. This fragility makes external funding more important, but also harder to secure.

Alternative Finance Filling the Gaps

Fintech lenders, private credit funds, peer-to-peer platforms and crowdfunding providers are now critical to the funding ecosystem. These options offer flexibility, speed and reduced reliance on collateral. These are all key benefits for businesses that fall outside high-street bank criteria, however rates charged are higher.

Strong Role for Government-Backed Support

The British Business Bank (BBB) continues to play a pivotal role. Its programmes have delivered over £32 billion in funding in the past decade alongside private partners, supporting more than 200,000 businesses. The blended public-private model is helping to extend credit where it might otherwise be withheld.

Innovation Driving New Solutions

The funding market itself is evolving. Revenue-based finance, embedded finance and AI-driven underwriting tools are changing how credit is assessed and delivered. Fintech innovation is making it easier for SMEs to access the capital they need – as long as they know where to look.

“SMEs need to think beyond the bank. The future of business finance lies in understanding the full funding ecosystem and shaping a strategy that’s flexible, multi-sourced.  It’s essential that your finance solutions are built around your business goals.” – Rich Olsen, Director, Pegasus Funding Solutions

A Dynamic Ecosystem for Growth

Despite global and domestic headwinds, the UK remains a leader in business funding innovation. The startup and scale-up ecosystem alone was valued at over $1.2 trillion by the end of 202. This makes it the largest in Europe and third worldwide behind the United States and China.

Investors continue to back businesses with strong growth potential, particularly in sectors such as fintech, AI, life sciences and clean energy. Private equity and venture capital are playing a selective but strategic role, with capital still available for companies that meet the higher expectations of today’s market.

There is a mix of funding types that SMEs should watch.

Startup Funding

Early-stage ventures benefit from robust angel networks and government-backed schemes like Start Up Loans, SEIS and EIS. Although venture capital volumes have cooled from their 2021 highs, the UK remains a prime location for investment in innovation-led businesses.

Survival and Turnaround Funding

Rising insolvency rates highlight continued stress in many sectors. However, government initiatives such as the Growth Guarantee Scheme and specialist bridging finance options are providing lifelines for viable businesses with short-term liquidity issues.

Growth and Expansion Funding

Mid-sized and growth-stage companies are accessing a diverse mix of funding. This includes traditional bank loans, asset finance, invoice finance, private equity and alternative lenders. While banks have tightened lending criteria, capital is still available for creditworthy borrowers with strong fundamentals and well-prepared applications.

An Evolving Funding Culture

The UK continues to move closer to the US model of diversified funding, rather than the EU’s more bank-centric system. The regulatory environment remains broadly supportive of SME funding and competition in the lending space.

What Should SMEs Do Now?

Securing the right funding in 2025 requires a proactive, strategic approach. SME leaders should:

Start early: Applications take longer to process, especially where lenders demand more evidence and reassurance.

Diversify funding sources: Don’t rely on one lender or type of finance. Blend bank debt, alternative lending and equity if needed.

Strengthen financial metrics: Improving profitability, liquidity and forecasting capabilities will open more doors.

Stay informed: Keep up with regulatory developments, new funding products and government-backed initiatives.

Looking Ahead

If your business is preparing to grow, diversify or restructure, now is the time to understand your funding options.

This article is the first in our three-part white paper mini-series. In the next edition, we’ll explore how businesses can use traditional and non-traditional funding to fuel growth and expansion. We’ll be sharing our insights into structuring finance for new projects, acquisitions, or market entry.

Get Expert Support

To explore your funding options and receive tailored advice, contact Pegasus Funding Solutions. Our team of experts is here to help you access the capital you need to unlock your business potential.

Call: 0203 327 0567

Email: [email protected]