Recession fear spurs loan demand among struggling UK SMEs

By Gloria Methri

Economic uncertainty is hitting small and medium-sized enterprises (SMEs) across the UK harder than ever, according to the latest findings from iwoca’s SME Expert Index. The report reveals a sharp rise in pessimism among SMEs, with the percentage of brokers reporting negative outlooks for their clients more than doubling since the last quarter.

The index, which surveys brokers who work closely with SMEs, shows that 34% now report pessimism among their SME clients, up from just 15% in the previous quarter. Only 36% of brokers say their SME clients are optimistic about the future, a significant decline from 56% in the last report.

These concerns come as fears of an impending recession resurface. Nearly half of the brokers (47%) report that their SME clients are worried about the possibility of a downturn, a noticeable rise from 35% in the previous quarter. This shift marks the first reversal in a year-long trend of declining recession concerns, suggesting a growing sense of unease about the economic landscape.

Cash Flow Becomes Top Priority

As economic pressures mount, SMEs are shifting their focus from growth to survival. Managing cash flow has now become the top reason for loan applications, with 61% of brokers citing it as the primary concern. This represents a notable increase from 49% a year ago. In contrast, only 36% of brokers report that their SME clients are seeking loans to fuel growth, the lowest figure since Q3 2023.

This dramatic shift underscores the urgency for financial stability in the face of rising costs and growing economic uncertainty. SMEs are increasingly looking to secure funding to keep their businesses afloat rather than to expand or innovate.

Surge in Demand for Larger Loans

With the economic outlook growing more uncertain, SMEs are turning to larger loans to safeguard their financial futures. Nearly half (45%) of brokers predict a significant increase in applications for loans exceeding £100,000 over the next year, up from 28% last quarter.

The trend towards larger loans is also reflected in the growing interest in even bigger financing. A quarter of brokers (15%) expect a rise in applications for loans above £200,000. In response to this growing demand, iwoca has expanded its Flexi-Loan offering, now allowing SMEs to apply for up to £1 million in finance.

Colin Goldstein, Chief Commercial Officer at iwoca, said, “Rising pessimism and fears of a recession are reshaping SME mindsets. We’ve seen a surge in demand for larger loans as businesses seek the financial stability they need in these uncertain times. By increasing the Flexi-Loan limit, we’re helping SMEs regain confidence and create the foundation for future growth.”

As the UK’s 5.6 million SMEs navigate these turbulent economic waters, the challenges ahead are clear. The shift from growth-driven loan applications to survival-focused financial support highlights the pressing need for businesses to secure cash flow and weather the storm of rising costs and economic uncertainty. With a growing demand for larger loans and a renewed focus on recession fears, it’s evident that SMEs are adjusting their strategies to prepare for a potentially bumpy road ahead.