Why Your SME Isn't Getting Funded, And How to Fix It

Entrepreneur

09-07-2025

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According to the British Business Bank, just 43% of smaller businesses successfully secured external finance in Q2 2024, down from 50% the year before. And even when businesses are referred to alternative lenders through the UK's bank referral scheme, only 1 in 20 actually get funding. So it's no surprise that applying for finance has become not only more complicated, but much more competitive.
Why lenders are more cautious
The drop in approval rates is mostly down to how uncertain the economy still feels, and because lenders are being a lot more careful about who they say yes to. Even though the UK economy grew by 0.9% in 2024, it's still only 3.2% above where it was before the pandemic, which is one of the slowest recoveries in the G7 countries. That kind of slow progress makes lenders nervous, so they're looking more closely at each application and only backing businesses that can show they're stable and low risk.
Adding to the challenge is a big shift in where SME lending is actually coming from. In 2024, 60% of business lending came from outside the major high street banks, the highest level on record. Challenger banks and specialist lenders are stepping in to fill the gap, but they're also being picky. Even though total lending to SMEs hit £62 billion last year, most lenders are now backing businesses that can show they've got their finances in good shape, with solid planning, stability and a clear ability to repay what they borrow.
The red flags that could be holding you back
Even businesses that are bringing in decent revenue are getting turned down for finance, and it's often because of small things that raise red flags. Relying too much on an overdraft, paying suppliers late, or filing your accounts with Companies House after the deadline can all make lenders nervous. These things signal that the business might not be managing its money well, which makes it harder for lenders to trust that a loan will be repaid on time.
Cash flow is still one of the biggest challenges for SMEs, and late payments are a major reason why. A 2023 study found that 27% of small businesses in the UK were owed between £5000 and 20,000 in unpaid invoices, and more than half said the problem had got worse over the year. When you're waiting on that much money, it puts a lot of pressure on your cash flow. And when lenders see those kinds of issues, it can make them question how sustainable or stable your business really is.
What lenders are really looking for
A lot of SME owners think that as long as their revenue is growing, they'll have no trouble getting funding. But in reality, lenders are looking at the bigger picture. Things like steady cash flow, consistent profits and whether you can realistically keep up with repayments all matter more than just how much money you're bringing in.
In 2024, loan approvals rose by 23% to nearly 45,000, and overdraft approvals jumped by 47% to just under 59,000. But that doesn't mean it's suddenly easier to get finance, it just shows that more businesses are applying. Lenders are still being selective. What they really want to see is a business that's clear about its numbers, has a solid plan, and can show how it'll repay the money. A steady cash flow forecast, an up-to-date balance sheet, and a clear repayment plan will go further than fast growth that hasn't been backed up by structure or strategy. The problem is often timing. By the time most SMEs apply, it's already too late to fix the numbers. Getting lender-ready starts six to twelve months earlier. You need to show that you're not just making money, but managing it well.
Common mistakes that cost businesses the loan
One of the biggest barriers is that SMEs aren't applying for funding at all. In 2023, only 3.5% applied for new or renewed finance, and just 26% looked for external advice about their financial position. Fear of rejection or uncertainty about where to start plays a big role, but without guidance, businesses often don't realise they're underprepared until they're already in front of a lender. By that point, it's usually too late to fix the gaps.
Even when businesses do apply, simple mistakes can hold them back. Outdated financials, projections that are too vague to be useful, or skipping over weaknesses in the hope they'll go unnoticed can all hurt your chances. With lenders being so selective, these things can quickly lead to rejection. Underinvestment is another common issue. 58% of SMEs who felt they hadn't invested enough blamed the high cost of credit, while 55% said they couldn't borrow at a fair rate. But often, it's poor planning and messy finances that are really getting in the way.
How to prepare for funding
If you want to improve your chances of getting funding, the work needs to start early, ideally six to twelve months before you apply. That means cutting back on overdrafts, paying suppliers on time, keeping your books and filings up to date, and building out realistic forecasts. It also helps to look at your business through a lender's eyes. If you wouldn't lend to yourself, it's probably time to tidy things up or bring in expert help.
Most importantly, these habits shouldn't only kick in when you're actively applying. The businesses that get a yes in 2025 will be the ones that already look strong on paper, not the ones scrambling to look organised at the last minute. Being lender-ready isn't something you tick off once; it's a way of running your business.
In today's cautious and competitive lending environment, ambition alone isn't enough to secure funding. Lenders want to see that your business is financially sharp, well organised and has potential to grow, without being risky. If you understand what they're looking for, deal with any red flags early, and build solid financial habits ahead of time, you'll be in a much stronger position to stand out and get the yes you're aiming for.