Why UK Businesses Are Borrowing More Despite Economic Uncertainty

According to UK Finance's Business Finance Review, SME lending increased by 16% year-on-year to £5.3 billion in the first quarter of 2026.

On the surface, that figure seems surprising. Inflation remains elevated, geopolitical tensions continue to create uncertainty, and interest rates are still significantly higher than the levels many business owners became accustomed to over the last decade.

Yet UK businesses are borrowing more.

The question isn't simply how much businesses are borrowing. It's why. Are business owners taking unnecessary risks in an uncertain economy, or are they recognising opportunities and using finance strategically to fuel growth while competitors remain cautious?

A Government-Backed Scheme Many Businesses Don't Know About

During the Covid pandemic, the Bounce Back Loan Scheme became one of the most recognised forms of business finance in the UK. It provided quick access to low-cost capital at a time when businesses desperately needed support.

While Bounce Back Loans no longer exist, government-backed lending certainly hasn't disappeared.

The Growth Guarantee Scheme (GGS), launched in July 2024 and administered by the British Business Bank, was introduced as the successor to the Recovery Loan Scheme. Its purpose is to help viable smaller businesses access finance when they may struggle to do so through conventional lending channels.

Under the scheme, the government provides lenders with a 70% guarantee on the outstanding balance of eligible facilities. This reduces the lender's risk and encourages them to support businesses that may not meet standard lending criteria despite being fundamentally profitable and capable of servicing the debt.

It's important to understand that the guarantee protects the lender, not the borrower. Businesses remain fully responsible for repaying the finance and must still satisfy the lender's affordability and credit assessments.

However, for many SMEs with strong growth plans but limited access to traditional funding, the scheme can open doors that may otherwise remain closed.

Matching The Right Finance To The Right Purpose

One of the most common mistakes businesses make is assuming every funding requirement should be solved with a traditional term loan.

A term loan is straightforward: borrow a fixed amount, repay it over an agreed period, and make fixed monthly payments. While suitable in many situations, it is often not the most efficient solution.

The businesses using debt most effectively in 2026 are tailoring their borrowing to match their specific objectives. By selecting the right facility, they can improve cash flow, reduce financing costs and access capital more efficiently.

Asset Finance

Asset finance is designed to fund the purchase of vehicles, machinery, equipment, technology and other business assets.

The asset itself often acts as security, reducing the need for additional collateral and making approval easier than some unsecured lending products.

Rather than making a significant upfront investment, businesses can spread the cost over an agreed term while preserving working capital for day-to-day operations and growth opportunities.

For businesses investing in productivity, expansion or operational efficiency, asset finance can be an extremely effective tool.

Trade and Invoice Finance

One of the biggest challenges growing businesses face is cash becoming trapped within the trading cycle.

Invoice finance allows businesses to unlock funds tied up in unpaid customer invoices, providing immediate access to working capital rather than waiting 30, 60 or even 90 days for payment.

Trade finance can support the purchase of stock or materials from suppliers, enabling businesses to fulfil larger orders without placing strain on existing cash reserves.

These facilities are particularly popular amongst businesses experiencing rapid growth, where sales are increasing faster than cash is being collected.

Revolving Credit Facilities

Many businesses don't need a lump sum of capital. They need flexibility.

A revolving credit facility provides access to an agreed credit limit which can be drawn down, repaid and reused whenever required.

Unlike a term loan, interest is generally charged only on the amount utilised rather than the full facility limit.

This makes revolving facilities particularly useful for managing short-term cash flow fluctuations, seasonal trading patterns or unexpected opportunities and expenses.

For many businesses, it functions as a permanent working capital tool rather than a one-off source of funding.

The Part Most Business Owners Get Wrong

The UK SME lending market is highly fragmented.

Most lenders specialise in particular products, industries or borrower profiles. A lender with an excellent term loan product may have little appetite for invoice finance. A specialist asset finance provider may not offer revolving credit facilities. Even lenders participating in the Growth Guarantee Scheme can have vastly different eligibility criteria and sector preferences.

Without an in-depth understanding of the market, business owners can spend days or weeks approaching the wrong lenders, completing unnecessary applications and potentially damaging their credit profile in the process.

As a result, many businesses never discover the most suitable finance option available to them.

Why Brokers Matter

This is where a good commercial finance broker adds value.

A broker's role isn't simply to find a lender. It's to understand the business, identify the most appropriate funding structure and connect the borrower with lenders whose appetite and criteria genuinely fit the opportunity.

Whether the objective is purchasing equipment, improving cash flow, funding growth, acquiring another business or accessing a government-backed facility, the right advice can significantly improve both the outcome and the cost of borrowing.

Most importantly, an initial conversation should cost nothing.

The Bottom Line

The businesses borrowing more in 2026 are not necessarily doing so despite the economic environment.

Many are borrowing because they understand it.

They recognise that growth opportunities still exist, that capital remains available, and that the right type of finance can be used strategically to strengthen cash flow, invest in expansion and gain market share while competitors remain hesitant.

The key is not simply borrowing more.

It's borrowing smarter.