Bright SPaRC
27 February 2026
| SME Net Lending | SME Gross Lending | SONIA | Insolvency Rate |
|---|---|---|---|
| £314m | £6.4bn | 3.73% | 51.7 /10k |
| Dec 25 | Dec 25 | 25 Feb | Jan 26 |
The Brief
The £15bn Overdraft Desert Is Reshaping SME Credit Risk — And Most Lenders Haven't Noticed
The collapse of the SME overdraft market is the single most important structural shift in UK small business finance this decade, yet the policy response announced this week barely acknowledges it. On 25 February, the government launched a new CDFI taskforce targeting £1 billion in additional lending over five years — the same day Allica Bank launched an SME overdraft product explicitly aimed at what it calls a "£15 billion overdraft gap." The juxtaposition is telling. Overdraft lending to small businesses has cratered from £18 billion in the late 1990s to just £2.7 billion today, according to Allica Bank's Rebooting SME Finance report, a product that once comprised 30% of all SME bank finance now accounts for just 5%. The government's £1bn initiative, which aims to scale CDFI lending from £82 million to £500 million for firms rejected by mainstream banks, is a policy sticking plaster on a wound fifteen times its size.
The second-order effect is more alarming than the headline numbers suggest. As Accountancy Age reported this week, the burden of corporate liquidity has quietly shifted to directors' personal pockets. This phenomenon is described as "shadow funding", where business owners plug working capital gaps from personal savings, credit cards, or home equity rather than through formal business facilities. This is invisible in BoE lending data. It means SME balance sheets look cleaner than the underlying reality, loan rejection rates have surged from 5–10% three decades ago to around 40% today according to the government's own access-to-finance review, and the CFIT-led coalition found that 94% of firms referred to a second lender after an initial decline are rejected again. The rational SME response — stop asking — now shows up in the data: only 25% of SMEs applied for external finance between 2022–24, down from 65% in the late 1980s, while the Bank of England's own survey found 77% would rather grow slowly than borrow.
For fintech lenders, this reshapes the competitive landscape in a non-obvious way. The traditional credit assessment question of "will this borrower repay?" increasingly needs supplementing with "how is this borrower currently funding their working capital, and is that sustainable?" Firms relying on director personal guarantees or informal personal lending to bridge cash flow are carrying hidden leverage that conventional credit data misses. Open Banking and Open Finance initiatives, including the FCA's SME Finance TechSprint running through February 2026, are designed to improve data availability. But they primarily surface business account activity, not the personal-to-corporate leakage that defines shadow funding. Lenders who can identify and price this concealed risk have a structural edge. Those who cannot are underwriting a borrower population whose true leverage is systematically understated. Watch for Allica's overdraft launch and the CFIT coalition's dashboard recommendations in Q2, if they succeed in making working capital visible again it will redraw the SME risk map.
The Signal
The smallest businesses are borrowing again — and they're borrowing hard. Lending to firms with turnover under £2m rose nearly 30% year-on-year, according to UK Finance data published 1 February. That dwarfs the 2.2% headline SME growth rate. Separately, HSBC UK's corporate lending review confirmed demand broadening across real estate, professional services, education, and technology. This is a volume signal, not a credit-quality signal. Origination teams chasing micro-SME growth need to price for a cohort that three years ago wasn't showing up at all.
Brokers now intermediate the majority of SME lending — £33bn and climbing. NACFB member brokers arranged £33 billion in SME lending during 2025, up 25% year-on-year, according to athe NACFB. The NACFB estimates its members account for nearly two-thirds of broker-originated SME lending, implying a total intermediary-led market of approximately £50 billion annually. Direct lenders without a broker distribution strategy are fishing in the smaller pond.
The UK securitisation overhaul goes further than the EU — and the window to shape it closes 18 May. The FCA (CP26/6) and PRA (CP2/26) published joint proposals reforming the UK Securitisation Framework on 17 February, with Mayer Brown's analysis confirming the scope: simplified investor due diligence opening UK investment into non-UK securitisations such as US CLOs, deletion of prescribed reporting templates for most asset classes, a new "L-shaped" risk retention option, and two exemptions from the resecuritisation ban. Implementation targeted Q2 2027. Lenders exploring securitisation as a funding channel should respond — this is the most permissive framework the UK has proposed since leaving the EU.
The Radar
- Economic uncertainty easing but still elevated: 31% of trading businesses reported uncertainty impacting turnover in early January 2026, down 2pp from December, with labour costs the top concern for 36% of firms with 10+ employees, per the ONS Business Insights Survey. Watch the February read for confirmation of the trend.
- Basel 3.1 settled — no incremental capital drag on SME books. PRA PS1/26 confirmed removal of existing Pillar 1 support factors will not increase SME or infrastructure capital requirements. Implementation runs 1 January 2027 to 1 January 2030. No further action needed unless PRA issues supplementary guidance.
Sources are listed inline. Bright SPaRC is generated with AI-assisted research.