Gross lending to UK SMEs fell to £5.2bn in the second quarter, down from £7.6bn in Q1 2021, new figures published by UK Finance have revealed.

The banking body’s latest Business Finance Review found that demand for new funding had declined in Q2, which also saw a fall in applications.

UK Finance’s findings indicated that the proportion of businesses open and trading again continued to increase through the second quarter, with 86% of businesses surveyed by the Office for National Statistics (ONS) trading at the end of the quarter, compared with 73% at the end of Q1.

Businesses trading again has also coincided with the beginning of some repayments for government-backed loans being required, UK Finance added. The review stated that this has led to a “substantial change” in the lending picture to SMEs compared with what’s been reported over the past year.

Applications for new loans fell sharply in Q2 following the end of the government-backed schemes. Data revealed that in the three months to June, the volume of loan applications was around a quarter of the level seen in the previous quarter, and only a fraction of that seen in the peak applications period in the same quarter a year ago. As a result, gross lending in Q2 dropped to its lowest level since the beginning of 2014.

The first half of this year has seen gross lending total £12.8bn, compared with over £40bn in the first half of 2020. The quarterly profile of lending shows the decline in borrowing from £34.5bn in Q2 2020, when the government-backed loan schemes were introduced, to £5.2bn in the most recent quarter. The level of lending in Q2 2021 was 31% lower than in the first three months of the year.

UK Finance managing director of commercial finance, Stephen Pegge, said that with the economy reopening in the second quarter and showing more normal trading conditions, the finance picture for SMEs has “shifted” from last year’s rapid increase in borrowing, driven by government-backed schemes, to managing repayment obligations.

“Demand for loans, overdrafts and other finance products has dropped from last year’s peak to levels closer to that seen before the pandemic,” Pegge said.

“Over a year after government-backed support was introduced, repayments are falling due and SME loan repayments have been accelerating as a result. Industry feedback indicates that most businesses are meeting their obligations or have arrangements in place to manage them, while the recovery takes hold.

“Nevertheless, some concerns about sustaining this are inevitable as some uncertainty about future growth prospects remains. While many SMEs have record levels of deposit reserves and headroom flexibility in existing facilities, those whose resources become stretched should always discuss options for forbearance with the lender. And for those with growth ambitions, funding is available to support expansion and investment.”

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