SME lending in 2025 looks very different from the years that followed the pandemic. Many assumed that sustainability-aligned lending had slowed because banks were losing interest or because the data gap around SMEs was too large to close. The reality is more complex. New data from the Bank of England, the British Business Bank and the OECD shows that SME lending patterns are being shaped by liquidity, risk appetite and borrower behaviour, not a lack of sustainability ambition. This makes one trend increasingly important for 2026: banks need clearer, structured sustainability data to understand SME borrowers and support lending where it is most productive.
SME lending is rising slowly
According to the British Business Bank’s Small Business Finance Markets Report 2025, SMEs have spent four years paying down large Covid-era debts and only returned as small net borrowers in Q2 2025. This means the market is not shrinking because banks are withdrawing credit. Instead, SMEs themselves are cautious about borrowing due to high rates, economic uncertainty and regulatory volatility. They also remain unexpectedly liquid. The same report shows SMEs holding historically high cash and deposit balances throughout 2024 and 2025, which reduces the urgency to take on new debt.
At the same time, the competitive landscape has shifted. Challenger banks and fintech credit institutions now hold 63 percent of the SME loan market, giving businesses far more choice and reducing dependence on the major high street banks. With this diversification, traditional banks are not losing deals because of sustainability expectations but because SMEs often perceive that approvals are harder to obtain. In fact, 30 percent of SMEs believe they will not be approved for a loan, even though approval rates have fallen mainly due to changing risk appetite, not sustainability requirements (British Business Bank’s Small Business Finance Markets Report, 2025)
The one sector defying the trend is real estate, where lending is growing strongly according to Bank of England data. In most other sectors, lending has normalised. Rather than rushing to borrow, many SMEs simply roll over maturing loans and avoid new commitments until rates stabilise further.
Why sustainability data still matters amid slow borrowing
Even though lending volumes are stabilising, the need for sustainability-aligned credit has not disappeared. If anything, the shift in SME behaviour makes disclosure-derived data more important for banks.
Three factors explain why:
- Regulators now expect banks to understand SME sustainability exposure, even if SMEs borrow less.
Banks need a clearer view of emissions, climate resilience, operational risk and social metrics across their business lending portfolios to meet expectations aligned with TCFD, TNFD and wider transition plans. Unlike corporates, SMEs rarely report this information directly. TDH’s analysis shows that most UK private companies between £2m and £100m turnover do not share structured sustainability data, creating a major visibility gap for lenders . - The shift toward challenger banks increases the need for accurate risk differentiation.
As competition grows, banks cannot rely only on financial ratios to price risk. They need more insight into resilience, environmental performance and operational strength. TDH’s product offers scalable, disclosure-derived insights that help lenders distinguish low-risk from high-risk SMEs without needing surveys or long questionnaires. Banks can get an initial view of a company based solely on public disclosures, and if they want to explore further, they can use TDH’s SME engagement services to gain a deeper, inside view of the business. - Slow borrowing gives banks more time to refine sustainability-linked products ahead of 2026.
OECD’s Platform on Financing SMEs for Sustainability 2025 states that banks are moving toward sustainability-aligned SME products but struggle with data inconsistencies and the cost of gathering information. A system based on analysing and benchmarking public disclosures solves this, reducing administrative burdens on SMEs who are sensitive to additional obligations on their under-resourced organisations.
How TDH’s insights help banks assess SMEs more effectively
Banks increasingly need access to structured sustainability information across all of their business customers to meet regulatory expectations and support transition planning. TDH fills this gap by delivering:
- Structured scoring of SME disclosures through a 120-question framework covering environmental, social and governance topics.
- Coverage across a wide range of UK SMEs using website analysis, artefact scanning and machine-learning extrapolation where disclosures are thin.
- Benchmarking by sector, revenue group and company size, allowing banks to place SMEs in context rather than assessing them in isolation.
- Risk indicators that surface weak spots in sustainability performance before they affect creditworthiness.
- APIs and dashboards that integrate into existing workflows, meaning banks can screen portfolios or individual borrowers with minimal effort.
This approach gives banks visibility into thousands of SMEs without intrusive engagement and helps them align products, pricing and reporting with sustainability objectives.
Conclusion
The slowdown in SME borrowing reflects liquidity and caution in SMEs combined with a changing credit market. But these factors make sustainability insights even more critical to target their lending to where need exists aligned with their digital first strategies.
Banks need reliable, comparable data to assess resilience, support better lending decisions and prepare for regulatory expectations. TDH’s disclosure-based insights give lenders the clarity they need across the SME landscape. As 2026 approaches, banks that build structured sustainability data into their lending strategies will be best placed to support SMEs and strengthen their own portfolios.
