SMEs are key drivers of the UK economy, but getting finance has never really been easy for them. In the past, banks were the main option, but they’ve become a lot more cautious lately, lending only where they feel things are very safe.
That’s opened the door for fintech lenders like Funding Circle, and now it almost feels like the whole system is shifting.
The latest numbers make it hard to ignore what’s happening. Funding Circle claims that its lending added £7.9 billion to the UK economy in 2025, and helped support around 117,000 jobs. It’s a big impact, and it shows how much small businesses rely on getting quick access to money.
A Market In Transition
On paper, SME lending in the UK looks pretty strong. Banks lent around £68 billion in 2025, which is actually one of the better years in a long time as conditions eased a bit. But when you dig a little deeper, it’s not really that simple. A lot of SMEs still find it harder than expected to get funding, and the picture feels a bit uneven depending on who’s applying and what they need the money for.
Banks are continuing to lend, but more cautiously; traditional lenders are reported to have adopted a ’more selective approach’ with more stringent criteria and a greater focus on lower-risk, established businesses, leaving a significant number of smaller or younger firms underserved, especially those without a long credit history or significant collateral.
Meanwhile, lending growth itself is stalling. While SME lending continued to increase, the pace slowed through 2025, with approvals flattening and loan sizes shrinking as economic uncertainty weighed on business confidence, suggesting that while capital is available, access is becoming uneven.
The Rise Of Alternative Lenders
Fintech and specialist lenders have filled this gap and now make up approximately 60% of SME lending in the UK, which is a significant shift in market power over the last decade, according to a Reuters report. Instead of models that are based on collateral and historic financials, Funding Circle and other similar platforms use technology, such as real-time cash flow data and automated credit assessment, to assess the businesses that banks might reject.
Another critical distinction is the speed of the process: Bank loan approvals can take weeks or months, while fintech platforms can deliver decisions in days, which can be important for SMEs who are trying to manage cash flow or respond to market opportunities.
Accessibility is also important, as traditional banks focus on lower-risk clients, while fintech lenders are willing to serve a wider range of businesses, including newer firms or those in volatile sectors, which is broadening the overall lending market rather than just redistributing it.
Cost Vs Convenience
But fintech lending is not without trade-offs. Cost is one of them: Alternative loans typically have higher interest rates than a bank loan and, because they are based on risk, they can be much higher for high-risk borrowers, who would not qualify for a low-cost bank loan, creating a natural tension: fintech lenders provide speed and access, while banks provide lower-cost capital (at least for those who qualify). For SMEs, the choice is not always a preference, but rather a question of availability: If a bank says no to a loan, a fintech platform may be the only option, in a sense, fintech is not competing with banks, it is filling the void left by banks.
Changing Risk Appetite
The changing role of fintech lenders is linked to these broader trends in risk appetite, as banks become more cautious in their lending (even when their volumes rise, they are often concentrating those volumes among the safest borrowers), and SMEs themselves become more cautious as slowing growth and uncertainty prompt some to take on less debt, or to look for more flexible financing. Fintech products, which are often designed with flexibility and short-term needs in mind, are filling the gap.
An Alternative To Banks
Can fintechs like Funding Circle actually replace banks? Not really. Banks still have the big advantages – huge balance sheets, regulatory backing, and cheap access to deposits. That stuff is hard to beat, especially when businesses need large or long-term loans.
“Banks are not just service providers. They are systemic institutions with trust, regulation, and scale that fintechs can’t easily replicate,” Chris Skinner, financial technology commentator and author, told International Finance.
But at the same time, something else is happening quietly. A lot of SMEs now go to fintech lenders first, especially when banks say no or take too long. So, it’s not really a replacement situation…more like a parallel system forming next to the old one.
Rather than outright replacement, what is emerging is a hybrid system: banks focus on low-risk, established borrowers, fintechs cater to speed, flexibility, and the underserved segment
The future of fintech in SME finance looks bright. As technology advances and data-driven lending models mature, the divide between traditional and alternative finance will likely continue to narrow. However, regulatory scrutiny and funding costs will determine how far fintechs can scale. Their long-term success will hinge on striking the right balance between growth and risk management—a discipline that banks have refined for decades.