By Colm Manning and Allan Mbugua.
This evolution is sometimes portrayed as evidence that tighter bank regulation has constrained lending. The evidence suggests a more nuanced story. Banks continue to play a central role in financing businesses, and the banking system has been able to support businesses through a series of major economic shocks. The latter is at least in part due to post-crisis regulation strengthening banks. At the same time, the composition of finance has changed materially, with challenger banks, international banks, bond markets and other non-bank lenders all playing a larger role than they once did.
As part of our Financial Stability and Growth series, this article explores how the UK’s business finance system has evolved and why those changes matter. Different businesses have different financing needs. A mature manufacturing firm, a local retailer, and a fast-growing technology company are unlikely to require the same type of finance. A more diverse financial system can offer a wider range of funding options and may be better placed to support investment, innovation and growth across the economy, although links between banks and market-based finance mean that stresses can still transmit across the system. Going forward, the financial system will have to evolve more as the economy changes, especially as more businesses rely on intangible assets to drive their growth.
Businesses need access to finance to invest, innovate and grow. A resilient and diverse financial system that channels finance to its most worthwhile uses is therefore an important part of the growth story. What matters is not simply how much finance is available, but whether different businesses can access the forms of finance best suited to their needs and stage of growth. But finance is only one determinant of growth. Economic uncertainty, infrastructure constraints, skills shortages, planning processes and the wider business environment also influence firms’ willingness and ability to invest.
Bank-provided finance to UK businesses has become more resilient
The GFC exposed serious vulnerabilities in the banking system. In the years preceding 2008, banks had taken excessive risks as household and corporate borrowing proved unsustainable and created vulnerabilities in both the banking sector and the economy that amplified the impact of the financial crisis (Chart 1). Banks also operated with insufficient capital and liquidity at this time. When the crisis hit, lending contracted sharply, amplifying the downturn and slowing the recovery. For many firms, particularly smaller businesses, access to finance became significantly more difficult, for example, refer to Bank lending to UK Small and Medium Sized Enterprises 2001 to 2012: evaluating changes.
Chart 1: Corporate debt has fluctuated over time because of the business and financial cycle (a) (b)
Footnotes
- Sources: Association of British Insurers, Bank of England, Bayes Commercial Real Estate (CRE) Lending Report (Bayes Business School (formerly Cass)), Deloitte, Finance and Leasing Association, firm public disclosures, Integer Advisors estimates, LCD an offering of Pitchbook, London Stock Exchange, LSEG Eikon, Office for National Statistics, Peer-to-Peer Finance Association and Bank calculations.
- (a) These data are for private non-financial corporations, which exclude public, financial and unincorporated businesses.
- (b) CRE is assumed to be lending for the buying, selling and renting of real estate, and the development of buildings.
Post-crisis reforms were designed to address these vulnerabilities. Higher capital and liquidity requirements aimed to ensure banks could continue supporting businesses through periods of stress rather than withdrawing credit precisely when it was needed most. The aim was to make the supply of credit more sustainable and reliable across the economic cycle.
Looking back, there is limited evidence that these reforms materially impaired aggregate credit provision to households and businesses. Some borrowers who may have obtained credit before the financial crisis may not do so today, reflecting both stronger lending standards and changes in how risks are assessed. An evaluation undertaken by the Basel Committee on Banking Supervision for example concluded that the reforms did not reduce overall credit provision. And stronger capital and liquidity have enabled banks to support businesses more reliably through subsequent shocks.
The evolution of UK corporate borrowing since the crisis is broadly consistent with this conclusion. Following the GFC, the stock of bank lending to corporates declined by around one third between 2008 and around 2015 as businesses and lenders sought to reduce leverage. Over the same period, market-based finance continued to grow by a total of about 50%. Bank lending to corporates began to rise from 2015. This followed the implementation of post-crisis regulatory reforms, including higher capital and liquidity requirements that strengthened and increased confidence in the banking system (Chart 1). From there, it grew by about one third up to the end of 2019, outpacing the growth of non-bank provided debt.
More recent developments since 2019 tell a similar story. The overall stock of corporate debt increased from around £1.2 trillion at end-2019 to around £1.5 trillion in 2026 Q1, despite a succession of major shocks. Bank lending increased sharply at the start of the pandemic, supported by Government-backed lending schemes. After a pause during 2021, both bank and non-bank provided debt resumed their rise. At the same time, repeated supply and energy shocks contributed to higher inflation and a sharp increase in nominal GDP. As a result, debt rose in cash terms but failed to keep pace with the increase in nominal GDP, causing the debt-to-GDP ratio shown in Chart 1 to fall. The fall in debt-to-GDP should therefore not be read as evidence that businesses have become less able to access external finance.
While the banking system amplified the recession associated with the GFC, it has acted as a source of resilience through subsequent shocks. This resilience is important because businesses often need financing most during periods of uncertainty. A banking system that continues supplying credit through stress may ultimately be more valuable than one that provides abundant lending during good times but is unable to sustain it during downturns.
Of course, a broad conclusion that the reforms have been net beneficial does not mean they should never be revisited. In 2025, the Financial Policy Committee revised downward its benchmark for the appropriate system-wide level of capital to reflect how the system had evolved in the preceding 10 years. And it is undertaking further work to assess and address areas where the framework could be made more efficient, effective and proportionate, or to address unintended consequences.
Chart 2: UK corporate debt provision diversified after the GFC
Footnotes
- Sources: Refer to Chart 1.
The financial ecosystem serving UK corporates has become more diverse
The providers of credit today look very different from those before 2008, even though banks remain central to UK business finance.
The biggest shift has been the growing importance of market-based and non-bank finance. During the post-crisis period, larger corporates increasingly diversified away from relying solely on traditional bank lending. Bond markets, institutional investors and other non-bank lenders have become increasingly important sources of finance. By the mid-2010s, non-bank debt accounted for more than half of corporate debt outstanding, compared with around one third before the financial crisis (Chart 2). By international standards, this development has moved the UK further towards the more market-based financing model typical of the United States, where corporates have long relied more heavily on bond markets and non-bank investors. This contrasts with the euro area, where bank lending has traditionally remained the dominant source of corporate finance. The UK today sits between these two models, combining a substantial banking sector with increasingly important capital market and non-bank funding channels.
This diversification does not mean banks have retreated from corporate finance. Instead, the breadth of financing channels available to businesses has changed. Banks remain important providers of credit to small and medium-sized enterprises (SMEs) and continue to provide substantial lending to larger corporates. They also play important indirect roles through underwriting, arranging syndicated loans, providing liquidity facilities and financing other market participants. In practice, the distinction between bank and non-bank finance is often less clear-cut than it appears. Banks frequently provide financing to non-bank lenders and investment funds, helping to support the wider flow of credit through the financial system. Understanding these interconnections between banks and non-banks is increasingly important as market-based finance grows, and is one of the areas being explored through the Bank’s system-wide exploratory scenario.
Larger firms have gained access to a broader range of funding sources
The shift towards a more diverse financing ecosystem has been most evident among larger corporates. Many large firms can access bond markets directly, borrow from international banks and raise finance from non-bank institutions (Chart 3). This gives them greater flexibility and allows them to switch between funding sources as market conditions evolve, reducing their reliance on any single provider of finance. However, links between banks and market-based finance mean that stresses can still transmit across the system.
The early stages of the Covid pandemic provide a useful illustration. As financial conditions tightened in March 2020, some large corporates drew on committed bank facilities as a precautionary source of liquidity. When market conditions subsequently stabilised, many returned to bond markets. This demonstrated both the value of having multiple financing channels and the continuing importance of banks as providers of liquidity during stress – refer to the August 2020 Financial Stability Report for more on this.
Chart 3: Larger businesses have a greater diversity of funding relative to SMEs
Footnotes
- Notes: Estimates are based on a range of data sources and should be interpreted as indicative. Corporate financing data, particularly for non-bank lending, are subject to measurement uncertainty. ‘Other’ consists of financial leases, direct insurer loans, leveraged loans. While the absolute value of direct fund lending is significantly larger for large corporates, it represents a higher share of SME debt because SMEs have a smaller stock of total outstanding debt. Evidence suggests that direct fund lending to SMEs is concentrated among larger SMEs and businesses in sectors such as commercial real estate and construction. SME debt will appear to have increased less quickly than large business debt since 2008 in part due to SMEs growing into large businesses over time, and so their debt is counted in the large business totals.
- Sources: Refer to Chart 1.
Financing smaller businesses can be challenging…
The picture is somewhat different for smaller businesses. While larger corporates now benefit from multiple financing channels, most SMEs remain heavily reliant on bank finance. SME lending has long faced cross-country supply and demand challenges. And the estimated share of UK SME debt-to-GDP has declined from around 12% in 2011, when data is first available, to below 10% in 2026 Q1.
Most SMEs do not have ready access to bond markets or many other forms of market-based finance. As a result, bank lending remains their principal source of external debt finance, accounting for at least 65% of outstanding SME debt (Chart 3). This share is even higher for smaller SMEs, as most non-bank SME debt is concentrated among the largest firms within the SME population. Unlike larger corporates, many smaller businesses have limited publicly available information, shorter credit histories and more concentrated business models. Assessing their creditworthiness can therefore be costly and time-intensive, particularly for younger firms or those operating in niche sectors.
From a lender's perspective, SME lending can also be riskier than lending to larger firms. Default rates tend to be higher, while recoveries following default can be lower and more uncertain. As discussed in What drives differences in commercial banks’ product level returns?, these higher operating costs and credit risks help explain why SME lending can be comparatively challenging despite its importance to the wider economy. These factors help explain why access to finance for SMEs remains a recurring policy issue in the UK and internationally.
At the same time, lower SME borrowing does not necessarily imply constrained credit supply. Distinguishing between supply-side constraints and demand-side factors remains challenging, as discussed further in Unlocking growth: what can the literature tell us about what’s holding back high-growth firms?. On the demand side, survey evidence suggests that many SMEs do not wish to expand rapidly and would prefer slower growth to taking on additional debt. The SME Finance Monitor consistently finds that between 80% and 90% of SMEs are ‘happy non-seekers’ of finance. On the supply side, the latest Bank Agents’ credit availability scores suggest that financing conditions for SMEs have returned to normal.
The providers of SME finance have also changed significantly over the past decade. While major banks remain the largest providers of SME credit, challenger and specialist lenders have steadily increased their market share (Chart 4). These firms often specialise in particular sectors, borrower groups or lending products and have made greater use of digital underwriting, data analytics and automated credit assessment.
Chart 4: SME lending remains bank-centred, but the mix of bank and specialist lenders has changed
Footnotes
- Notes: The chart contains UK regulated firms only. B6 MFIs consist of Barclays, HSBC, LBG, Nationwide, NatWest and Santander MFI bank groups. Other UK MFIs include institutions not captured within the B6 or foreign-owned branches and subsidiaries. This includes the challenger and specialist banks referenced in the article. The sharp increase in the purple and orange series in 2025 was due to an expansion in the coverage of the Bank’s data collection to capture SME lending by more non-big six banks.
- Sources: Bank of England statistics data.
As a result, challenger and specialist banks accounted for around 60% of gross SME lending in 2025. Government initiatives such as Commercial Credit Data Sharing and the Business Growth Service may further improve lenders’ ability to assess smaller firms. Meanwhile, major banks have adapted by embracing fintech capabilities and developing specialist propositions for innovative and growth-oriented SMEs. Together, these developments have broadened the range of financing options available to smaller businesses.
Taking all of this together, SMEs now have a wider range of potential financing providers than in the past. This diversification may be particularly valuable because SMEs are not a homogeneous group. The financing needs of a family-owned retailer differ from those of a specialist manufacturing business. A more diverse set of lenders may be better able to serve the diverse needs of the SME population.
…while high-growth firms need different forms of funding relative to other businesses
The distinction between different types of SMEs becomes especially important when considering high-growth firms (HGFs).footnote [1] HGFs make up a relatively small share of UK businesses, but they often contribute disproportionately to productivity growth, innovation and job creation as found in Unlocking growth: what can the literature tell us about what’s holding back high-growth firms? Their financing needs can differ substantially from those of more established firms.
Many high-growth firms invest heavily in intangible assets such as software, intellectual property (IP), data, research and development, or customer acquisition. These investments are difficult to collateralise, and their future returns can be highly uncertain. Conventional bank lending is often less well suited to these types of businesses with uncertain cash flows and few tangible assets, particularly at earlier stages of growth. Recognising these challenges, the Government has asked the British Business Bank to explore how its guarantee programmes could support lending backed by IP, and the Financial Policy Committee highlighted and supported ongoing work to expand IP-backed lending as part of efforts to improve access to finance for high-growth firms.
This reflects the different strengths of different financing providers. Commercial banks typically have comparative advantages where borrowers generate predictable cash flows or possess assets that can serve as collateral. HGFs frequently have neither. Many invest heavily today in anticipation of profits tomorrow, may be loss-making during expansion phases, and often possess relatively few tangible assets against which borrowing can be secured. Because of this risk profile, traditional debt finance is often not the most appropriate source of funding for the highest-growth firms. Instead, they frequently rely on providers of risk capital such as venture capital funds, growth equity investors, venture debt funds and other specialist investors. These investors are often better equipped to assess uncertain growth opportunities and can accept higher risks in exchange for higher potential returns.
This highlights an important aspect of the UK’s evolving financing system. Different institutions are competitive in different parts of the financing ecosystem. Banks remain critical providers of working capital, trade finance and lending to many established firms. Challenger banks have expanded competition and increased financing options for some SMEs. Meanwhile, venture capital, growth equity and other specialist investors have become particularly important for firms whose financing needs fall outside traditional lending frameworks.
Seen through this lens, the rise of challenger banks and alternative finance providers should not necessarily be viewed as replacing traditional banks. Rather, it reflects the emergence of a more specialised financial ecosystem in which different providers serve different financing needs. For ambitious and innovative firms, the key benefit may be not simply more finance, but a wider range of financing models from which to choose.
Financing growth in an evolving economy and financial system
There has been a broadening of the institutions providing finance to UK corporates over the past 20 years.
Post-crisis reforms have helped create a banking system that is better able to support firms through periods of stress. Banks remain central to business finance and continue to provide most lending to SMEs. At the same time, a broader ecosystem of challenger banks, international banks, bond investors and specialist non-bank providers has emerged. Large corporates now have access to a wider range of financing channels, while many SMEs benefit from greater competition among lenders.
Yet important financing challenges still remain. Access to finance has been a longstanding issue for some SMEs, reflecting both supply-side frictions and demand-side factors. Financing gaps may also persist for some high-growth firms, particularly during the scale-up stage when businesses have outgrown early-stage funding but are not yet attractive to larger providers of capital.
The diversity of financing needs discussed above helps explain the wide range of initiatives currently under way across Government, regulators and industry. Efforts range from improving the efficiency and effectiveness of regulation, to supporting innovation in financial products and markets, to developing new mechanisms for connecting investors with growing firms. To this end, Government and policymakers continue to explore whether the UK can mobilise a greater pool of long-term domestic capital to support investment and growth, through the Mansion House Accord for example.
Bank Insights articles do not necessarily represent the views of the Bank of England’s policy committee members.
The OECD defines HGFs as ‘enterprises with average annualised growth in employees or turnover greater than 20% per annum over a three-year period, and with more than 10 employees in the beginning of the observation period’.