Accounting for three-fifths of Britain’s GDP and employment, these are the firms that create jobs, drive investment and keep local economies moving. Getting them investing will play a critical role in getting growth going again.

But there’s a problem. A recent report by Allica revealed that the number of SMEs seeking external finance has plummeted from 65% in the 1980s to just 25% today, leaving the UK with the lowest loan application rate in the OECD. Meanwhile, the Bank of England found last year that 77% of SMEs would prefer to grow more slowly than to borrow to grow.

In fact, since the financial crisis, Allica’s research showed that UK SME lending is now £65bn below its long-run trend. As part of this, the provision of overdrafts — typically the lifeblood of SME working capital — has fallen by 90% from £27.1bn in 1990, to just £2.7bn in 2024.

This drop in investment has real consequences. When businesses hold back on buying equipment, developing their teams or scaling up, growth and productivity stall. It’s one of the reasons the UK continues to sit at the bottom of the G7 for business investment — a position we’ve sadly held for years.

A big part of the issue is structural. Since the financial crisis, banks have moved towards lending that’s heavily tied to physical collateral, largely property or machinery, reinforced by shifts in regulation and accounting rules. But with Britain now an economy where services make up around 81% of output, most established businesses are investing in software, skills and operational improvements instead of hard assets.

And because they often don’t have the kind of security banks want, access to the right kind of productive finance has become increasingly difficult. That leaves a growing gap — and fewer opportunities for businesses to invest with confidence.

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A proven tool

The good news is there is a ready-made solution out there in the form of the Growth Guarantee Scheme, operated by the British Business Bank. Many brokers will have come across it before, given that it has already supported £2.5bn of lending to SMEs, the majority of which has been done outside of London.

The scheme provides a 70% government guarantee to lenders on SME loans lacking traditional collateral. Borrowers remain fully accountable for repaying the loans, but it unlocks investment that otherwise wouldn’t have been made.

The scheme has already proven its effectiveness — the focus now needs to be on scaling it. At its current capacity of £1.2bn a year, the UK scheme is three to four times smaller as a share of GDP than equivalent programmes in the United States, Germany, France and Spain.

It was disappointing to see last month’s Budget pass over the Growth Guarantee Scheme. It’s vital the government looks again at how the Scheme can support growing businesses – especially those that don’t have the ‘hard asset’ collateral traditional lenders prefer. There’s a clear route to do this without adding pressure to the public purse — adjust the guarantee fee in line with the price of the loan, so the cost better reflects the underlying risk.

Taking this approach would allow the Scheme to fund itself while directing support to where it can make the biggest difference. It would help businesses access growth capital they currently miss out on, or can only secure at a far higher cost.

A clear path to unlock growth

Allica would like to see the Growth Guarantee Scheme doubled in the short term, with a clear plan to expand it to £4bn over the next five years. And it’s vital that this happens sooner rather than later. The beauty of the Scheme is its simplicity — no new institutions, no complicated legislation, just the political will and Treasury backing to scale a mechanism that already works.

Doing so would send a strong, credible signal that the UK is serious about reigniting growth and reversing years of underinvestment. For brokers, it would mean more clients getting the confidence and capital they need to invest, hire and push forward. And for the economy as a whole, it would be a meaningful step towards getting Britain’s growth engine firing again.