High-growth firms (HGFs) play a vital role in job creation and economic growth. They also rely more heavily on external finance than typical small and medium-sized enterprises (SMEs) and struggle to access the finance needed to scale. They primarily use debt financing, most of which is short-term finance for operating purposes, but face persistent barriers, especially those lacking tangible assets. Fewer HGFs use equity financing, but it is crucial for innovation-led scale-ups that often encounter a ‘missing middle’ funding gap. Issues like low financial literacy and aversion to external finance also weigh on demand and limit the use of finance by HGFs. These challenges are not unique to the UK and are prevalent across many advanced economies.
Firms with high-growth potential make a disproportionately large contribution to employment growth and rely more on external finance than the average SME
SMEs make a significant contribution to economic growth and employment in the UK. While most SMEs remain small (Nesta (2013)), a subset demonstrates considerable high-growth potential. The literature consistently finds that HGFs make a disproportionately large contribution to employment growth (Anyadike-Danes et al (2009); Felix et al (2021); Enterprise Research Centre (ERC) (2015); Nesta (2013); Organisation for Economic Co-operation and Development (OECD) (2021); Haltiwanger et al (2013)) and Haltiwanger et al 2016. UK evidence also shows that firms with strong productivity growth are more likely to become HGFs. Furthermore, SMEs that have already achieved HGF status tend to experience further productivity improvements over time (Du and Temouri (2015)).
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’. Using the same definition, the ONS finds that 13,750 businesses (4.7%) were classified as HGFs out of businesses that had 10 or more employees in 2023. This definition omits micro firms which also make a substantial contribution to the UK economy. But, this is mitigated somewhat as, even though start-ups make a substantial contribution to the UK economy, it is a myth that HGFs are all young and small (Brown et al (2017)). It also fails to capture the sporadic nature of firm growth. Growth is rarely linear over time, with most HGFs having periods where they grow more quickly, or more slowly. To address this, the literature is gradually moving to a ‘growth pipeline’ approach that sheds light on the different factors that underpin the scaling-up process (Hart et al (2020); OECD (2021); and ERC (2025)). For this review, we use ‘high-growth firms’ and ‘scale-ups’ interchangeably, acknowledging definitional inconsistencies in the literature.
Scale-ups are more likely to seek external finance than the general SME population and often encounter critical financing gaps (ScaleUp Institute (2023)). Lee (2014) finds that both HGFs and potential HGFs (firms with similar characteristics that have not yet achieved rapid expansion) share concerns about access to finance. These findings underscore the critical role that access to finance plays in enabling firms to scale effectively.
High-growth firms struggle to access the capital needed to scale, particularly if they lack tangible assets, or access to a relationship lender
The SME Finance Monitor and the Scaleup Survey find that the most common form of finance used by scale-ups is debt. This debt funding is mostly used to operate the business and includes (ranked by frequency of usage) overdrafts, credit cards or loans, leasing/hire purchase, trade credit and invoice finance, among others (ScaleUp Institute (2023)). Barriers to accessing large-scale bank debt include insufficient collateral, reliance on traditional backward-looking credit scoring, and lengthy approval processes. And since SMEs are not usually monitored by credit rating agencies, significant information asymmetries exist between these firms and their lenders (Petersen and Rajan (1994)).
Traditionally, relationship lending helped mitigate these barriers through the use of long-term interactions with borrowers to gather private, often soft, information to inform credit decisions (eg, Brancati (2015)). Hoshi et al (1990a, 1990b and 1991) find that Japanese firms with close banking relationships are less likely to be liquidity constrained in their investments. Beck et al (2018) find that relationship lending alleviates credit constraints for SMEs during downturns, especially for smaller and more opaque firms, and in regions more severely affected by economic shocks. Relationship banking or the availability of soft information can also translate to lower collateral requirements (Degryse et al (2021)).
Between 2012 and 2022, the total number of bank and building society branches in the UK fell by 40% (Booth (2023)). Studies in other countries show branch closures significantly reduce corporate lending, particularly for small, collateral-poor, and risky firms (Becker and Amberg (2024)), and have substantial negative real effects on firm performance (Becker and Amberg (2024); and Ranish et al (2025)).
Fintech lenders and private debt have emerged as increasingly important providers of finance to SMEs
In the past decade, non-bank lenders have increasingly served SMEs that traditional banks overlook (British Business Bank (BBB) (2024)). Fintech lenders have helped fill gaps left by branch closures, especially in remote areas and have a growing role in SME finance worldwide (Cambridge Centre for Alternative Finance (CCAF) (2024)). Fintechs lend to a wider range of SMEs at potentially lower cost by using more extensive data and machine learning to assess creditworthiness (Cornelli et al (2024)). Big data from technology firms also reduces collateral requirements and helps solve information problems in SME credit markets (Gambacorta et al (2023)). These lenders also further support SMEs as they offer streamlined digital onboarding and customer-focused products, including flexible repayment and uncollateralised loans (CCAF (2024)). The Financial Conduct Authority’s regulatory sandbox has worked well to boost fintech firms’ funding prospects while also improving survival and innovation outcomes (Cornelli et al (2024)).
Private debt has also become an increasingly important source of finance for smaller businesses that are seeking to grow quickly (BBB (2024)). Venture debt offers flexible repayment terms to fast-growing companies. It helps support operations and growth, particularly between equity rounds, and lessens ownership dilution issues. Mann and Gonzalez-Uribe (2024) argue that venture debt lenders have distinct capabilities from traditional venture capital (VC), positioning them as well-suited investors during periods of strategic uncertainty, such as awaiting patent approval. In the UK, the venture debt market accounts for 8%–10% of venture capital—higher than the European average of just 5%, but still behind the more developed market in the US, where it represents 15%–20% (AFME (2017)).
Equity investment supports the growth of HGFs and improves their ability to withstand economic shocks
Only around 20% of scale-ups raise equity from external investors and there is a large degree of heterogeneity in the use of equity financing among scale-ups (ScaleUp Institute (2023)). For example, scale-ups that invested in innovation in recent years are much more likely to rely on equity. Innovation has been identified as an important predictor of scaling-up, highlighting the importance of equity for certain types of HGFs (ScaleUp Institute (2023)).
Müller and Zimmermann (2009) find that German SMEs with high research and development intensity, particularly in high-tech sectors, exhibit a greater need for equity capital. Similarly, Allotti et al (2021) emphasise that equity financing is a vital alternative for growth-oriented SMEs, especially those with intangible assets that are difficult to collateralise. Frank and Sanati (2021) further demonstrate that equity issuance leads to significantly greater real asset growth than the same net debt issuance. They argue that equity is a more natural initial financing route for expanding firms as it does not require collateral and facilitates investment in physical capital, which can later secure debt. This aligns with the ScaleUp Institute (2023) that finds that equity funding improves scale-ups’ access to external finance. Although equity-based financing tends to be most suitable for innovative, high-tech, firms, these firms are a small fraction of the UK’s HGF population (Anyadike-Danes et al (2009); Brown and Mason (2014); OECD (2021); and ScaleUp Institute (2024)).
HGFs face a ‘missing middle’ equity financing gap between early-stage capital and the point at which the business secures substantial follow-on investment.
Estimates of the UK equity financing gap vary widely. The UK Government’s Patient Capital Review in 2017 estimated an overall annual equity funding gap of around £4 billion, and the problem is most acute for companies requiring more than £5 million in equity investment (BBB (2023)). The £5 million plus investment band is critical for facilitating scaling-up, and the Business Growth Fund seeks to fill this gap (AFME (2017)).
The equity gap is linked to a shortage of ‘patient capital’, especially for research and development -intensive and deep tech firms (BBB (2023)). The BBB’s British Patient Capital Funds programme addresses this issue by coinvesting with private investors. Several governments have experimented with similar coinvestment models (Quas et al (2022)). Public-private partnerships can encourage private investors to participate in funding HGFs by improving the risk-return profile for private investors. This public involvement can result in longer investment periods (Buzzacchi et al (2013)) and help raise the supply of patient capital.
There are significant regional disparities in small business funding across the UK
Regional disparities in small business funding remain pronounced across the UK BBB’s (Nations and Regions Tracker 2024 Report). Equity investment is highly concentrated, with London, the South East, the North West, and the East of England accounting for over 85% of deals despite hosting only 55% of businesses. This imbalance reflects investor proximity, over 80% of equity deals occur within two hours of the investor, rather than a lack of HGFs. Rural businesses that face limited access to growth finance often rely on personal funds. Lee and Brown (2016) find that innovative firms located in peripheral regions are more likely to seek bank finance but face higher rejection rates. Degryse et al (2018) show that areas with a richer and more diverse financial funding system are more conducive to credit access.
Regional disparities also affect scale-ups with half reporting that funding is concentrated in London and the South East, and not reaching them (ScaleUp Institute (2023)). The BBB’s Nations and Regions Investment Funds, launched in 2022, helps address this issue by targeting venture capital initiatives to address geographic disparities.
Demand-side factors such as ‘borrower discouragement’ reduce the demand for finance by HGFs and further limit scale-up growth
‘Borrower discouragement’ describes firms that have potentially good investment opportunities but do not apply for external funding. Brown et al (2018) estimate that up to half a million UK SMEs may fall into this category, with risk aversion and pessimism around the economic outlook being the main reasons for discouragement. They show that growth-oriented SMEs are substantially more likely to be discouraged than non-growth oriented peers. In addition, a pattern of ‘debt aversion’ was observed in a recent SME survey by the Bank of England and the Department for Business and Trade. Approximately 70% of businesses preferred slower growth over taking on debt (2024 Quarterly Bulletin).
Wilson (2015) notes that most policy interventions in OECD countries have focused on the supply side as these are viewed as more direct and visible signs of action. He argues that demand-side interventions, such as incubators, accelerators, business angel networks, and matchmaking services, have a critical role to play. HGFs and the broader SME population would benefit from initiatives to boost financial literacy and managerial skills, as deficiencies in both are strongly linked to borrower discouragement (Owen et al (2023)). Business support programmes that offer a blend of business development and leadership training designed for small businesses with high growth potential can be highly effective in addressing demand-side constraints. They can boost the performance of participating firms in terms of job creation, innovation, and access to external finance (Goldman Sachs 10,000 Small Businesses programme).
Firms with good growth prospects might prioritise avoiding diluting their ownership at the cost of limiting their growth potential (eg, Myers and Majluf (1984); Brown and Lee (2014); and OECD (2015)). This highlights the need for non-dilutive solutions. Venture debt lending offers flexible repayment terms and can be particularly beneficial for firms with variable income or limited physical assets. Platform-based finance solutions – often referred to as ‘embedded finance’ – can provide SMEs with automated funding by leveraging data from their accounting software, e-commerce dashboards, or payment processors. For example, a SME using cloud accounting software might get a credit line offer based on its real-time cash flow. Hau et al (2024) find that automated credit lines for Alibaba vendors boost sales, transactions, and customer satisfaction.
The debt and equity financing gaps faced by UK HGFs are seen across many advanced economies, particularly in Europe
Cross-country evidence highlights that the SME financing challenges are not unique to the UK (OECD (2025)). Many SMEs even struggle to access finance in the US despite its deep capital and banking markets (Brown et al (2020); and Chen et al (2017)). Regional disparities within countries are widespread and not unique to the UK. Capital cities and regions typically have the highest concentration of equity and debt finance and SMEs in peripheral regions find it more difficult and costly to obtain loans (OECD (2025)).
The UK VC market is underdeveloped relative to the US, which benefits from greater maturity, deeper capital pools, stronger institutional investor participation, and a more favourable regulatory environment, which enables VC investment by pensions funds and insurers. This continues to constrain the ability to scale innovative UK firms and, by extension, to drive productivity growth (Arnold et al (2024)). European and London-based scale-ups raise only half the capital on average secured by their counterparts in San Francisco by age 10, a gap consistent across sectors and economic cycles. Many European companies are driven to seek US funding and often pursue exits through foreign acquisitions or listings on US stock exchanges (European Investment Bank (EIB) (2024)).
The UK VC market is, however, relatively well developed compared to other European countries (EIB (2024)). It is currently the largest in Europe, and accounts for nearly 50% of all VC investment across the continent (BBB (2024)). It is also on a clear upward trajectory. Its share of global VC investment rose from 3.4% during 2014–16 to 5.8% over 2021–23, representing the largest increase among the top 12 global markets in that period. The UK now has the third-largest VC market globally, behind only the United States and China (BBB (2024)). The UK also benefits from a strong network of business angels and a vibrant equity crowdfunding scene, supported by tax incentives like Seed Enterprise Investment Scheme and Enterprise Investment Scheme – often cited as European best practice. AIM also stands out as Europe’s most active junior stock exchange (AFME (2017)).
The sectoral concentration of HGFs in the UK differs from other countries, highlighting that there is no one size fits all policy solution. International comparisons show significant variation. For example, information and communications technology firms dominate in San Francisco, while London has a concentration of finance-related scale-ups, and manufacturing is more prevalent among European Union scale-ups (EIB (2024)). These differences highlight the need to consider industrial composition when assessing ecosystems.
Barriers that slow growth of HGFs have tangible economic consequences. Recent International Monetary Fund research highlights that Europe’s productivity gap with the US is significantly driven by firm-level constraints, particularly among frontier and HGFs, such as limited market size, restricted access to market-based financing, and insufficient venture capital.
This post was prepared with the help of Sudipto Karmakar and Isabelle Roland, with thanks to Mark Hart and Stephen Roper of the Warwick Business School and Enterprise Research Centre.
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