Smaller business lending markets show signs of improvement, though equity investment declines in the South East
- Equity investment in the South East declined by 18% in number of deals and 41% in investment value
- The South East was home to 5% of total equity investment in the UK by value
- Gross SME bank lending increased by 9% to £68bn, the second highest level since 2012, as credit conditions eased gradually through the year
- Challenger and specialist banks accounted for 60% of gross SME bank lending in 2025, up from 39% in 2012
- AI companies raised £2.9bn in Q1-Q3 2025 across 323 deals, accounting for around two-fifths of total UK equity investment
The British Business Bank’s Small Business Finance Markets 2025/26 report, published today, reveals that equity investment has declined within the South East, while smaller business lending nationally showed signs of improvement.
Equity investment declines in the South East of England
The South East saw an 18% decline in equity investment by number of deals in 2025 (Q1-Q3) to a total of 107 deals. The decline in the value of equity investment in the South East was even greater – a 41% decline to a total value of £376m.
This value represented a 5% share of total equity investment in the UK, putting the South East in the top five of all UK Nations and regions (behind London, Scotland, the East of England and the South West).
Smaller business finance proves resilient despite headwinds
Nationally, business dynamism is showing signs of improvement, with 314,000 start-ups created in 2025, up 1% on the previous year, and with a net rise in the overall business population.
External finance remains widely used, with around 50% of smaller businesses using external finance in 2025. Credit cards (19%) and overdrafts (16%) were the most commonly used products in Q3 2025, alongside leasing and hire purchase (13%), reflecting increased use of flexible, short-term finance. This suggests, however, that debt finance is being used for stability rather than growth.
There is an accompanying broader awareness of finance options, with 62% of smaller businesses in 2025 stating they knew where to obtain information on different types of finance. This is five percentage points higher than in 2024, indicating greater visibility and understanding of the choices available.
Challenger and specialist banks’ market share exceeded big five banks for the fifth consecutive year
A more diverse mix of lenders, products and businesses is reshaping competition, supporting innovation and expanding choice, and the British Business Bank is playing a key role, helping shape the market for lending in the UK as a champion of both challenger banks and alternative lenders.
Challenger and specialist banks accounted for 60% of gross SME bank lending (excluding overdrafts) in 2025, up from 39% in 2012. The growth of non-bank lenders over the past decade means over two thirds (68%) of overall SME lending in 2025 came from either challenger and specialist banks or non-bank lenders.
Since 2013, 28 new providers have entered the smaller business banking market. Of these, 43% are, or have been, British Business Bank delivery partners.
Challenger and specialist banks also continue to play a leading role in technological advancements and have helped facilitate new entrants. Examples of these advancements include ‘bank in a box’, Software as a Service (SaaS), and digital-only finance providers.
AI attracting significant equity investment
AI is attracting a significant share of equity investment. AI companies raised £2.9bn across 323 deals in Q1-Q3 2025, accounting for around two-fifths of total UK equity investment, highlighting a strong investor focus on innovation.
Steve Conibear, Director, East and South East of England, UK Network British Business Bank, said: “Despite declines in equity investment into the South East last year, today’s report highlights that the South East of England continues to own a significant share of the UK’s equity deals and value.
“Conditions are not easy for small businesses at the moment, as the report findings show. However at the British Business Bank, we are committed to continue supporting smaller businesses in the South East, helping to improve their access to external finance, and drive growth throughout the region. Our South East Investment Fund, announced last summer, will be an exciting new vehicle to help stimulate this growth.”