Closing the SME funding gap

Britain’s small businesses are facing a perfect storm. Consumer confidence has dropped to a four-month low, operating costs continue to climb, and fears of impending tax hikes loom large. Yet the most significant barrier to SME growth isn’t external, it’s psychological. New research reveals that nearly 60% of UK entrepreneurs abandon loan applications midway through the process, not because they’re unqualified, but because the system makes them feel that way.

 

This isn’t just a funding gap. It’s a confidence crisis which is costing the UK economy dearly.

 

 

The hidden cost of financial exclusion

The British Business Bank estimates the UK SME funding gap at up to £65 billion, and modelling by the Centre for Finance, Innovation and Technology suggests this shortfall could shrink GDP growth by 1.2 percentage points annually over the next decade. These aren’t abstract figures; they represent thousands of businesses that never scale, jobs that are never created, and innovations that never reach the market.

 

What’s driving this crisis? Recent research surveying 250 small business founders uncovered a troubling pattern of behavioural barriers that go far beyond traditional credit constraints. More than half of SME founders associate borrowing with shame or failure, 42% feel embarrassed asking lenders basic questions, and 23% have signed finance agreements they didn’t fully understand. These startling figures speak to how broken the UK system has become.

 

This phenomenon, which behavioural economists call "anticipatory rejection," sees founders self-select out of funding opportunities to avoid perceived reputational or emotional cost. They’re not being turned away; they’re walking away. And in doing so, they’re delaying growth plans, postponing hiring decisions, and shelving innovations that could drive their businesses forward.

 

 

Why SMEs feel left behind

Traditional lending wasn’t designed for digital-first businesses. These companies often have strong revenue streams but lack the physical assets or lengthy trading histories that conventional credit scoring demands. 57% of founders said the application process made them feel overwhelmed or nervous. Financial jargon, such as "working capital facilities," and "asset-based lending" creates immediate barriers for those without financial backgrounds, and when founders can’t understand products or ask questions without embarrassment, they disengage entirely.

 

This inaccessibility is a design failure. Financial services have long assumed founders should adapt to the system, rather than the system adapting to them.

 

 

What government and lenders must do

Addressing this crisis requires coordinated action from the government, regulators, and lending providers. The government must prioritise financial education as economic infrastructure. Research from Oxford Saïd Business School shows funding requests rise by nearly 49% among entrepreneurs with business education, who raise twice as much capital on average. Government-backed programmes embedding financial literacy into entrepreneurship support, from business advisory services to regional growth hubs, would deliver measurable returns.

 

Furthermore, regulators should incentivise transparency. Requiring lenders to publish plain-language product explanations with standardised comparisons would help founders understand true costs. 82% said clearer terms would improve their confidence, making it essential infrastructure for a functioning SME finance market.

 

Finally, we need better data on application abandonment rates, rejection reasons, and behavioural barriers across lender types. Without this visibility, policy remains guesswork.

 

 

The power of peer networks and advisory support

Education alone won’t solve this crisis. When founders access guidance from those who’ve navigated similar challenges, finance stops feeling like a trap. Peer networks create psychological safety where asking questions becomes normalised, transforming raw information into actionable insight.

 

Business support organisations and accelerators should integrate financial mentorship into core offerings, something the government could catalyse by funding regional SME finance advisory services. Specialist guidance focused on navigating the capital landscape would be incredibly valuable, as 60% of founders said they would consider borrowing if better educational resources were available.

 

 

Reimagining capital for digital business

The future of SME finance must reflect how modern businesses actually operate. For eCommerce and digital-first companies, traditional lending models feel antiquated. These businesses need capital products that understand recurring revenue, customer lifetime value, and digital growth metrics, not just property and personal guarantees.

 

This requires lenders and fintechs to fundamentally rethink product design. Capital solutions should be embedded where founders already work: in accounting software, eCommerce platforms, and business management tools. Application processes should be transparent, with real-time feedback that explains decisions and suggests alternative paths when appropriate.

 

Crucially, lending must become a relationship, not a transaction. Founders need lenders who provide data, context, and guidance throughout their journey, partnering with lenders who help build financial capability alongside providing capital.

 

 

A Call to Action

Britain’s SMEs represent 99% of our businesses and are fundamental to economic resilience. Yet we’ve built a financial system that makes the majority of founders feel underconfident, overwhelmed, and excluded. This isn’t just ethically problematic, it’s economically illiterate.

 

Closing the £65 billion funding gap requires more than increased lending volumes. It demands a fundamental reimagining of how we support, educate, and empower the entrepreneurs who drive growth and innovation. Government, lenders, fintechs, and business support organisations must work together to dismantle the behavioural barriers that hold founders back.

 

The tools exist. The demand exists. What’s needed now is the will to make SME finance genuinely accessible, not just in theory, but in practice. Because when we give founders clarity, control, and confidence, they don’t just borrow more. They build more. And Britain’s economy grows stronger as a result.

 

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Katherine Chan is CEO and Founder at Juice Ventures

 

Main image courtesy of iStockPhoto.com and howtogoto