UK SMEs rely on short term loans
Recent data indicates that financing for UK SMEs grew by nearly 10% to £68 billion in 2025, with the majority of funds sourced from challenger banks and non-bank lenders. While borrowing remains a routine aspect of business operations, issues arise when short-term loans transition from strategic tools to temporary fixes.
Rise of Short Term Loans
This increase in lending has led to more choice for businesses seeking finance, but it also means more complexity. In Q4 2025, 37% of all small business loan applications were taken out purely to support cash flow, up from 33% the year before. This shift away from growth-led borrowing and towards survival-mode finance can quietly spiral into something more serious.
Warning Signs of Reliance on Short-Term Borrowing
For insight into what is and isn’t a healthy business relationship with finance, we spoke to Stuart Wilkie, Head of Commercial Finance at Anglo Scottish Finance. He identified five warning signs that a business might be becoming reliant on short-term borrowing.
One of the clearest signals is borrowing to cover existing repayments. Wilkie says this is a pattern that tends to escalate, with each new facility coming with its own interest rate, terms, and repayment schedule. This can leave very little room for anything else, and what began as a short-term solution becomes a long-term drain on cash flow.
Another warning sign is taking multiple finance facilities in a short space of time, a practice sometimes referred to as ‘loan stacking’. This can lead to a business being committed to several concurrent loans with overlapping repayment schedules, posing a significant personal risk to the director who has guaranteed the loans.
Wilkie also notes that repayment terms can put pressure on daily operations, particularly if a business has a seasonal revenue cycle or operates on 30- or 60-day invoice terms. This can create a chronic shortfall between incomings and outgoings, leading to further borrowing to cover the gap.
Breaking the Borrowing Cycle
In the middle of the situation where businesses have to deal with various lenders, it’s essential to consider how businesses can avoid relying too heavily on short-term borrowing. By understanding the underlying issues driving the need for finance and exploring alternative, longer-term products, businesses can reduce their repayment burden and create a more sustainable financial foundation. This requires a thorough review of the business’s financial situation and a willingness to seek independent advice.
Using unsecured finance to fund long-term assets or investments is another warning sign. Wilkie says that unsecured short-term loans are designed to solve short-term problems, but they are sometimes used for long-term investments, often to the significant detriment of the businesses involved. Asset finance, on the other hand, is specifically designed for this kind of investment, allowing businesses to spread the cost of an asset over its useful lifetime.
Borrowing reactively rather than strategically is also a common route into persistent financial difficulty for SMEs. Wilkie notes that understanding cash flow in detail is central to understanding why reactive borrowing is so common, and potentially so damaging. Many business owners are experts in their trade, not in finance, and can be susceptible to accepting the first offer they’re given or agreeing to terms that sound manageable but compound quickly.
Seeking Independent Advice
According to Wilkie, the role of a credible broker is to slow down the borrowing process, understand the business properly, and make sure the product genuinely fits. If a business recognizes any of these warning signs, Wilkie advises seeking independent advice before taking on anything further. A good broker will review existing facilities, identify whether there’s a more suitable product available, and, if necessary, tell the business that the right answer is to pause rather than borrow. The businesses that get into serious difficulty are rarely the ones that asked too many questions – they’re the ones that didn’t ask enough, and Wilkie emphasizes the importance of seeking guidance from a trusted expert.
Wilkie emphasizes the importance of taking stock of the full picture of debt and having a clear plan for managing it.
