UK SME lending hit £5.3 billion in the first quarter of 2026, according to UK Finance’s latest Business Finance Review. That’s a 16% year-on-year increase and the highest quarterly figure since the Covid lending schemes wound down in mid-2021.
Behind the headline number, though, the data tells a more complicated story about who’s borrowing, from whom, and why. Continue reading to see which sectors are driving demand, how the lending market is changing, and what the Iran conflict means for the rest of the year.
Who’s Actually Lending
The £5.3bn figure covers gross lending by the main high street banks: Barclays, Lloyds, HSBC, NatWest, Santander and others. But those names no longer control the market the way they once did.
According to the British Business Bank, challenger and specialist banks accounted for 60% of gross SME bank lending (excluding overdrafts) in 2025, up from 39% in 2012. When non-bank lenders like invoice finance houses and asset finance providers are included, 68% of all SME lending now comes from outside the traditional big five.
That said, challenger bank market share held flat year-on-year for only the second time in a decade, which suggests the post-2008 disruption may be reaching a ceiling. Bank of England data covering the wider market confirms similarly strong overall growth in Q1, so the trend isn’t limited to high street lenders alone.
Which Sectors Are Driving Demand
The £5.3bn total isn’t spread evenly across the economy. Real estate lending was up over a third year-on-year and, in value terms, accounted for nearly three-fifths of the total increase across all sectors. Agriculture was up nearly a quarter, while wholesale and retail has now seen sustained double-digit lending growth over the past 18 months. The standout figure was recreation and personal services, where lending jumped 66%, though UK Finance notes that lending patterns in that sector tend to be erratic.
Manufacturing and accommodation and food services were the only two sectors where lending actually fell in Q1, both contracting for a second consecutive quarter. That’s a notable detail, given how often manufacturing is assumed to be a driver of SME borrowing.
Small Firms Are Leading the Charge
The most striking detail in the Q1 data is the 51% year-on-year surge in lending to the smallest businesses (those with turnover up to £2 million). That takes quarterly lending for this group to its highest level since early 2018, excluding Covid-era schemes, and marks seven consecutive quarters of double-digit growth. The Bank of England’s Credit Conditions Survey backs this up, pointing to strong credit supply and solid demand from smaller firms, particularly in commercial real estate.
Medium-sized firms saw a more modest 4% increase, but that was still the fastest rate of growth recorded this year. The average size of facilities approved to both small and medium-sized businesses has remained static in current prices since the pandemic. UK Finance’s data doesn’t point to a trend toward larger or smaller loans. Instead, it’s the volume of lending to the smallest firms that’s doing the heavy lifting.
That flat average tells its own story. While the smallest firms are driving volume, businesses that need a large business loan to fund property acquisitions, equipment overhauls or multi-site expansion aren’t borrowing more frequently. They’re borrowing differently. These facilities tend to require bespoke structuring from specialist lenders, which is one reason they don’t show up as a trend in headline lending data.
New Approvals Point to Continued Momentum
Looking ahead, the approvals pipeline suggests this lending momentum won’t disappear overnight. The value of new loan approvals rose 36% compared with Q1 2025, while the number of approvals increased 42%. Overdraft approvals also recovered after contracting at the end of last year, rising 15% by value and 20% by number. Every sector covered by UK Finance’s data saw higher volumes of new loan approvals than a year ago, with real estate and construction particularly notable.
But there’s a big caveat: approvals don’t always convert into drawdowns. With uncertainty rising sharply from late February onwards, some of these approved facilities may never be used.
Confidence, Caution, or Both
A key question is whether the Q1 figures reflect genuine investment or defensive cash management. According to the detailed figures in the UK Finance Business Finance Review Q1 2026, the answer is both.
Some of the borrowing clearly relates to growth. The strength in real estate lending, the surge from the smallest businesses, and the jump in loan approvals all point to firms investing in expansion, property, and new capacity. GDP grew 0.6% in Q1, up from 0.1% in Q4 2025, and business investment rose 0.9% after falling 3.0% the quarter before.
But there are also signs of precautionary behaviour. Overdraft utilisation ticked up to 49.3% by the end of Q1, the highest since March 2024. The sectors driving that increase (manufacturing, construction, recreation) suggest firms are using existing facilities to manage rising costs and stockpile ahead of price increases. Deposits also continued to trend down, with a small drop in time deposits for the first time in over a year.
The Iran Conflict Changes the Outlook
The positive Q1 lending data largely reflects decisions made before the US-Iran conflict escalated at the end of February. That conflict, and the effective closure of the Strait of Hormuz, has since pushed energy prices sharply higher, raised inflation expectations, and introduced a level of uncertainty that wasn’t present when most Q1 loans were approved.
The Bank of England has held the base rate at 3.75% since the conflict began, with markets now pricing in at least one rate hike before the end of the year. That’s a reversal from early 2026, when rate cuts were widely expected. UK Finance’s own data hints at an early behavioural change: loan applications dipped in March while overdraft applications rose, a pattern similar to what happened when the Ukraine war broke out in 2022.
The services PMI has signalled a contraction in business activity, with the composite reading falling to its lowest since April 2025, and energy-intensive sectors like transport, manufacturing, and agriculture will face further cost pressure if the Strait of Hormuz remains disrupted. The SME Finance Monitor consistently identifies the economic climate as one of the top three barriers to growth, and that barrier just got higher.
Where Q1’s Lending Surge Goes from Here
The £5.3bn Q1 figure confirms that SME lending momentum was building strongly at the start of 2026, driven by the smallest businesses, a handful of high-growth sectors, and a steadily diversifying lender market. But the timing is awkward. Much of this lending reflects confidence that existed before the Iran conflict reshaped the economic outlook.
If the conflict de-escalates and energy prices stabilise, the approvals pipeline suggests continued growth through the middle of the year. If it doesn’t, businesses will likely pull back on new borrowing and lean harder on existing overdraft and revolving credit facilities. The next quarterly data from UK Finance will tell us which way it went.
David Prior
David Prior is the editor of Today News, responsible for the overall editorial strategy. He is an NCTJ-qualified journalist with over 20 years’ experience, and is also editor of the award-winning hyperlocal news title Altrincham Today. His LinkedIn profile is here.
