The Financial Conduct Authority is to focus on digital verification, Consumer Credit Act reform and open finance after finding that smaller businesses continue to face significant obstacles when seeking funding.
The regulator said its review found no evidence that FCA regulation itself was a major barrier to SME finance, but identified a series of problems affecting businesses on both the demand and supply sides of the market.
These range from difficulties understanding available funding options and lengthy application processes to repeated customer checks, limited financial histories and the availability of suitable lending products.
SMEs account for 60% of employment and 51% of turnover in the UK private sector, according to the FCA. However, just 21% of the total value of UK business loans is provided to SMEs, while 54% of SMEs do not use external finance.
The regulator also cited evidence that only 6% of smaller UK businesses believe the current provision of credit is sufficient to meet their needs. Some 26% said accessing SME credit was complex and 39% pointed to the high cost of credit.
The British Business Bank estimates that the outstanding stock of bank lending to SMEs was 22% lower in real terms in 2025 than in 2012.
MICROBUSINESSES FACE THE GREATEST CHALLENGES
The FCA found that problems were particularly acute among micro and start-up businesses, which account for 95.5% of SMEs.
Businesses with limited trading histories, financial records or tangible assets can find it more difficult for lenders to assess their risk, particularly when seeking smaller unsecured loans. The regulator said these firms could also struggle to identify suitable products and providers or be discouraged from applying because of the perceived complexity of the process.
Among businesses that sought finance in the three years to December 2025, only 17% of sole traders and 36% of firms with one to nine employees borrowed more than £25,000. By comparison, 57% of small firms with 10 to 49 employees and 76% of medium-sized firms borrowed above that level.
The review also highlighted concerns about repeated requests for information during applications. SMEs can be required to provide similar documentation to brokers and several lenders, increasing processing times and potentially making it harder to compare products.
Meanwhile, lenders raised concerns about the cost and complexity created by Consumer Credit Act requirements for regulated SME lending. The FCA said the planned reform of the Act could provide an opportunity for a more proportionate regime while retaining protections for borrowers.
OPEN FINANCE GIVEN KEY ROLE
The FCA intends to concentrate on three areas: monitoring work on digital verification to reduce duplicated customer checks, implementing a revised regulatory regime following Consumer Credit Act reform and developing open finance, with SME lending identified as a priority use case.
It said better access to financial data could give lenders more complete and timely information about smaller businesses, helping to reduce application friction and support credit decisions where conventional accounts and trading histories provide only a limited picture.
An FCA discussion paper on the first open finance scheme is due in early 2027, with SME lending and consumer mortgages among the areas being prioritised.
Samuel Edwards, head of client portfolio management at global financial solutions firm Ebury, says: “The FCA’s review lays bare the challenges many SMEs face when trying to access the finance they need.
“For some, it can be difficult to know which funding options are best suited to their business, while others can face lengthy application processes, extensive checks or find that traditional lending is less accessible without significant assets or a long trading history.
“The FCA’s review is therefore welcome, particularly its focus on making the process easier to navigate and reducing unnecessary barriers.
“This matters even more in the current environment. Tariff volatility, geopolitical turbulence, rising input costs and a more restrictive tax environment have all put pressure on SME cash flows in recent years, meaning more businesses need access to flexible finance to manage working capital and keep pace with changing conditions.
“In response to these challenges, we’re seeing increasing demand at Ebury for unsecured, flexible supplier financing, as SMEs look for ways to manage cash flow without tying up working capital.
“This growing demand underlines the importance of ensuring SMEs have access to a wider range of flexible funding options, helping this important sector navigate ongoing pressures while still having the headroom to invest and reach full growth potential.”
The FCA said other issues identified during the review included personal guarantees and the role of alternative lending. Stakeholders raised concerns that commission-based incentives among some unregulated brokers could steer microbusinesses towards higher-cost, short-term finance that may not be appropriate for their needs.
It also found evidence of regional disparities. London accounted for 61% of UK equity investment by value and 47% of deals in 2024, while smaller and less established businesses outside London and the South East could be more exposed to weaker financial networks and reduced access to specialist advice.
The regulator said its work would sit alongside wider government and industry measures, including reforms to the Bank Referral Scheme and Commercial Credit Data Sharing Scheme and increased financial capacity for the British Business Bank.
