Small Firms Hold Fire on Borrowing as Budget Looms

SMEs are the engine of UK growth – yet the latest data from the Bank of England suggests they aren’t quite revving up.

When the Bank released its latest Money and Credit data, most headlines focused on household borrowing and mortgages. But tucked inside the report is something far more important for the backbone of the UK economy: how small and medium sized businesses are faring when it comes to accessing finance.

The short answer? Cautiously.

A Quiet Period for Sme Borrowing

After several months of fairly modest borrowing activity, SMEs recorded net repayments again in both August and September. In simple terms, more money flowed out of small business bank borrowing than flowed in. According to the Bank, SMEs paid back around £0.1 billion in September, roughly the same as August:

That is a clear sign founders are pulling back on debt, not leaning into it.

Confidence Remains Subdued

There are some bright spots. The annual growth rate in SME lending nudged up from 1.3% to 1.6%, suggesting conditions have softened compared to the peak of the rate hiking cycle. Borrowing costs have also eased slightly from recent highs, with the effective rate on new SME loans dropping from 6.35% in August to 6.18% in September.

Still, borrowing remains relatively expensive by historical standards and appetite to take on fresh debt is clearly subdued. Confidence is improving, but not enough for SMEs to go all in on growth.

A Continuation of Last Year’s Mood

Employment Hero’s SME Sentiment Report from last year found more than half of UK small business owners struggling with rising costs and inflation, forcing many to prioritise stability over expansion.

That cautious stance has not shifted meaningfully since then. Employment Hero’s 2025 Business Productivity Report shows leaders continuing to focus on efficiency and productivity rather than bold growth or hiring plans:

The UK section of the Employment Hero Annual Jobs Report 2025 reinforces this pattern, showing a slowdown in SME hiring and headcount growth as labour costs and operational pressures remain high. In other words, the hesitancy seen throughout 2024 is still very much with us in 2025.

For founders, this moment calls for balance. Lower rates provide an opening, but uncertainty means strategy comes first. Selective investment, productivity improvements and careful cash flow management remain top priorities.

Winter Productivity

However, there are signs that a productivity window is opening. Real-time data suggests October and November are among the most productive months of the year, with teams back in rhythm and leave at its lowest levels since spring. For SMEs trying to do more with tight resources, this period offers a chance to build momentum before the year-end slowdown.

Kevin Fitzgerald, Managing Director at Employment Hero, suggests this time of year brings a renewed sense of focus as routines reset. He notes that employees “use October and November to plan, get organised and set themselves up for a strong finish to the year.”

Pointing to a critical moment for SMEs to maximise output while teams are fully engaged. He adds: “We often see businesses using this moment to lock in priorities and sharpen execution before the festive season begins.”

Budget Support Could Shift the Dial

With the Budget approaching, the big question is whether the Chancellor will deliver meaningful support for small business lending and investment to ensure this productivity continues. Because if SMEs do not feel confident enough to borrow and grow, any wider recovery risks being uneven or short-lived.

For now, there is no sign of panic, just restraint. And while a pause is better than a retreat, stronger momentum from policymakers could turn cautious optimism into meaningful growth.