Challenger banks have maintained their dominance in lending to small and medium-sized enterprises (SMEs), but new data suggests their rapid rise may be easing as major high-street lenders begin to reassert themselves.
Challenger banks accounted for 60 percent of SME loans in 2025, unchanged from the previous year, according to new analysis from the British Business Bank. This figure is only the second time in more than a decade that their market share has failed to increase, raising questions about whether disruption in the SME lending market has plateaued following the financial crisis.
The shift in lending dynamics has been one of the key structural changes in British banking since the 2008 financial crisis. Traditional lenders such as Lloyds Bank, NatWest, Barclays, HSBC and Santander once dominated SME financing, accounting for 61 percent of loans as recently as 2012. However, regulatory changes, technological innovations and dissatisfaction among smaller businesses created room for a new generation of lenders to emerge.
Challenger banks such as Starling Bank, Allica Bank and Oxbury Bank have since built significant market share by offering more flexible lending models, faster decision-making and digital-first services tailored to the needs of SMEs.
But the latest data suggests that momentum may be stabilizing. Louis Taylor, chief executive of the British Business Bank, said it remained unclear whether challenger banks had reached a natural ceiling or whether incumbent lenders were regaining ground.
“There is some willingness from major banks to stem this decline in market share,” Taylor said, noting that traditional lenders are increasingly targeting profitable SME segments such as deposits, transaction banking and foreign exchange services.
Current activities support this view. Lloyds, for example, announced plans to provide £9.5bn to SMEs this year, while a consortium of major banks has committed £11bn to support SME exporters. These moves signal a renewed focus on a segment that major banks were widely criticized for neglecting in the wake of the financial crisis.
Nevertheless, challengers and non-bank lenders continue to dominate the broader SME financing ecosystem. The report found that non-bank lending and challenger banks together now account for 68 percent of total SME lending, underscoring the diversification of funding sources available to businesses.
Alternative financing providers have become particularly influential. Funding Circle remains the largest non-bank lender, accounting for a “low to mid-50 percent” share of corporate loans by volume. The growth of such platforms reflects a structural shift towards more fragmented, specialized lending models that address different risk profiles and business needs.
Overall lending showed signs of resilience. Gross new loans to SMEs rose 9 per cent to £68bn last year, the second highest annual total in more than a decade. Repayments reached £63 billion, resulting in net lending of £4.6 billion – the first positive net figure since 2020.
However, beneath these headlines there are signs of underlying weakness. The total value of outstanding loans and overdrafts has fallen by 22 per cent in real terms since 2012, while the use of traditional overdrafts has fallen to a record low of £7bn. Only 9 percent of SME loans come from conventional bank loans.
Instead, companies are increasingly relying on short-term and flexible forms of financing. Credit cards and overdrafts remain widespread, suggesting that many companies are prioritizing cash flow stability over long-term investments. Leasing is also growing in popularity, rising from 6 percent of SMEs in 2012 to 13 percent last year, particularly for equipment and machinery.
Loan approval rates have improved slightly, rising from 49 per cent last year to 53 per cent in 2025, but are still well below pre-pandemic levels of 74 per cent in 2019. This has led to greater reliance on intermediaries, with brokers facilitating £33 billion of SME loans last year, up 25 per cent on 2024.
The report also points to persistent structural gaps in the market. Smaller loans, early-stage companies and companies focused on intellectual property continue to struggle to access finance due to lenders’ risk aversion and the limitations of traditional credit scoring models.
“There are some loopholes in the system,” Taylor said, referring to the referral system that requires banks to refer rejected applicants to alternative lenders. Because many applications are rejected before they reach the formal credit committees, companies often miss this route entirely.
The overall picture shows a maturing but still developing market. Competition has intensified, keeping prices for low-risk loans competitive. However, due to structural constraints and economic uncertainty, borrowing costs remain high for higher risk SMEs.
For policymakers and industry leaders, the critical question is whether the current equilibrium represents a new equilibrium or simply a pause in an ongoing transition. While challenger banks have transformed access to finance over the last decade, the renewed commitment of brick-and-mortar lenders suggests that the competitive landscape is entering a new phase, one characterized less by disruption and more by consolidation and coexistence.
In this context, the plateau at 60 percent may not represent a peak, but rather a stabilization point in a market that is still adapting to a fundamentally different model of SME financing.
