SME Funding Gap Widens as Debt Funds Target £75m+ Deals

A significant shift in the UK lending landscape is creating both challenges and opportunities for financial institutions. As debt funds increasingly focus on large-ticket transactions exceeding £75 million, a substantial funding gap has emerged for small and medium-sized enterprises (SMEs), despite their critical importance to the economy.

This growing disparity between capital availability and SME financing needs represents a strategic opportunity for specialised lenders with efficient loan management systems. However, capitalising on this market requires technological innovation and operational excellence to profitably service smaller loans at scale.

The Evolution of Debt Fund Focus: How £75m+ Deal Targeting Creates SME Financing Opportunities

The lending environment has undergone a fundamental transformation since the 2008 global financial crisis. What began as a response to banks withdrawing from real estate lending has evolved into a thriving alternative lending sector. New challenger banks and specialised debt funds have grown rapidly, with the top 50 debt funds raising an impressive $275 billion globally in the five years to the end of 2023 [1].

However, this success has paradoxically recreated the very financing gap these institutions initially emerged to address. These funds now must deploy capital through direct, big-ticket lending deals, typically £75 million or more, or via indirect strategies. As a result, many former niche lenders have grown too large to serve smaller projects, effectively abandoning the market segment they originally set out to support [1].

The strategic evolution of these debt funds reflects broader market dynamics. Initially positioned as agile alternatives to traditional banks, many have transformed into institutional-scale operations with corresponding changes in investment criteria. This shift has been driven by the need to deploy increasingly large capital pools efficiently, leading to a natural gravitation toward larger deals with similar due diligence requirements but higher returns in absolute terms.

Despite this shift, traditional banks remain reluctant to fill the void, constrained by regulatory pressures, interest rate volatility, and asset repricing challenges. This creates a significant opportunity for specialised lenders who can efficiently service smaller loans while maintaining profitability.

The operational economics of servicing smaller loans present a key challenge. Lenders targeting sub-£75m deals face higher relative costs due to outdated loan management systems that lack automation and efficiency. These operational inefficiencies erode margins on smaller deals, making them less attractive to larger funds that have optimised their operations for bigger transactions.

Quantifying the SME Financing Gap: Market Size and Growth Potential

The scale of the SME financing gap represents a substantial market opportunity for lenders with appropriate technology infrastructure. According to the British Business Bank, only 43% of smaller businesses accessed external finance in Q2 last year, down from 50% at the end of 2023 [2]. This declining trend reflects several factors, including tightening lender risk appetite in response to economic uncertainty, rising interest rates affecting affordability, and SMEs' own reluctance to take on debt in a challenging economic climate.

Research demonstrates that companies borrowing between £5 million and £10 million are twice as likely to achieve 'super growth' (defined as growth of 50% above inflation) [2]. Those borrowing over £10 million were three times more likely to reach this growth threshold. Despite these compelling benefits, many UK SMEs remain reluctant to take on debt, creating a significant market inefficiency.

Regional disparities further compound this challenge. A 2024 report by Oliver Wyman highlighted a 35% funding gap between certain UK regions and the rest of the country. Regions such as the Midlands, North West, Yorkshire and the Humber, Scotland, and Wales captured only about 15% of equity deal flow from 2019 to 2022, despite contributing over 45% to the UK's Gross Value Added (GVA) and hosting 50% of SMEs [24].

The British Business Bank's Small Business Finance Markets Report 2024 corroborates these findings, noting that London received 46% of equity deals and 58% of total investment by Q1-Q3 2023 [25]. This concentration underscores the ongoing regional disparities in access to finance, creating additional opportunities for lenders who can develop expertise in underserved markets.

What makes this gap particularly attractive for specialised lenders? Despite higher growth rates among borrowing companies, the average insolvency rate for UK mid-size firms has remained steady at just 1.4%, even for those that borrow [2]. This suggests that properly underwritten SME loans can deliver strong returns with manageable risk profiles.

Technology Requirements for Efficiently Managing Sub-£75m Loan Portfolios

As large debt funds abandon sub-£75 million deals, lenders targeting this space must leverage advanced loan management systems to maintain profitability despite smaller ticket sizes. The integration of workflow automation, enhanced risk assessment tools, and efficient servicing capabilities becomes essential for managing the higher operational complexity of numerous smaller loans compared to fewer large transactions.

Financial institutions are increasingly integrating artificial intelligence technologies to enhance customer engagement, automate workflows, and extract insights from vast datasets [3]. These applications include AI-powered virtual assistants, personalised financial advisory services, and fraud detection systems.

Artificial intelligence is revolutionising underwriting specifically by reducing processing times from days to hours. Machine learning algorithms analyse data from numerous sources, including traditional financial statements, transaction histories, market trends, and alternative data points like social media activity and customer reviews. This comprehensive analysis leads to more accurate loan assessments and enhanced fraud detection.

Banks are also leveraging AI technologies to enhance credit risk management. By utilising deep learning and big data analysis, AI can accurately assess borrowers' creditworthiness, identify potential risks, and provide real-time monitoring and early warning systems [4]. This approach aims to improve decision-making and reduce losses while enabling lenders to efficiently manage larger portfolios of smaller loans.

Specific technological capabilities that SME lenders need to prioritise include automated underwriting and risk assessment systems that reduce the time and cost of evaluating smaller loans, real-time monitoring tools that provide early warning of potential issues across a larger portfolio, streamlined servicing platforms that minimise the operational burden of managing numerous smaller transactions, integrated compliance systems that efficiently navigate evolving regulatory requirements, and data analytics capabilities that enable more accurate risk pricing and portfolio management.

Quantifiable ROI: The Business Case for Advanced Loan Management Systems

The implementation of advanced loan management systems has delivered measurable cost savings and efficiency gains for lenders targeting the SME market. These concrete ROI metrics demonstrate the business case for technology investment in this sector.

Fenergo, a leading private bank provider, has demonstrated how AI-powered systems for client lifecycle management can dramatically reduce compliance costs. Their FinCrime Operating System uses six "autonomous AI agents" that work like a digital compliance team, automatically handling everything from client onboarding to suspicious transaction detection. Early adopters have seen operational costs plummet by 93% while reducing document processing time by nearly three-quarters [26].

SWIG Finance, which reported record lending of £14.8m to smaller businesses across the South and West Country in 2024/25, has been able to scale its operations significantly through technology adoption. The firm experienced high volumes of Start Up Loans applications resulting in over 480 loans worth £8.2m, with 28% of the funding being invested into increasing productivity [27]. This scale would be impossible to achieve without efficient loan management systems that automate key aspects of the lending process.

The ROI of advanced loan management systems is particularly compelling for lenders targeting the SME market abandoned by large debt funds. By reducing the operational costs associated with originating and servicing smaller loans, these systems enable lenders to profitably serve this market segment while maintaining appropriate risk controls.

Real Estate Lending Trends: Implications for SME Property Finance

The real estate sector exemplifies the broader SME financing challenge, with both traditional banks and evolved debt funds now avoiding smaller property deals. Despite the significant capital raised by alternative lenders with real estate expertise, these funds must deploy this capital through large transactions, typically exceeding £75 million [1].

This creates a significant opportunity for specialised lenders with property expertise and efficient loan management systems to fill this gap, particularly as the sector continues to face regulatory pressures and interest rate volatility that require sophisticated monitoring and servicing capabilities.

A recent example of this trend can be seen in the £6.4 million property finance facility secured by MAF Finance Group for Hayhill Developments from Aldermore Bank. This funding enables the mid-size housebuilder to construct more homes across multiple projects and grow at scale. Notably, this is the first time Hayhill has used bank funding, having previously financed nine projects with the capital of its owners [28].

The situation is further complicated by the fact that despite regulatory pressure, interest rate rises, and asset repricing challenges, traditional banks remain reluctant to lend in the volumes they once did [1]. This dual retreat—of both banks and larger alternative lenders—from smaller real estate deals creates a particularly acute financing gap in this sector.

Regulatory Considerations for Lenders Targeting the SME Financing Gap

Regulatory changes create both opportunities and compliance challenges for lenders targeting the SME financing gap. On May 7, 2025, the UK's Financial Conduct Authority (FCA) initiated a consultation to simplify mortgage issuance and advisory rules [5]. The goal is to make mortgage modifications more accessible, efficient, and affordable, thereby enhancing consumer financial flexibility and supporting economic growth.

While potentially easing access to finance, these changes require loan management systems with robust compliance capabilities to navigate evolving regulations efficiently. Lenders with advanced systems can turn regulatory complexity into a competitive advantage when serving smaller borrowers abandoned by large debt funds.

The compliance burden from evolving regulations creates excessive manual work and risk exposure for lenders without adequate technology support. This regulatory complexity disproportionately impacts lenders targeting smaller deals, as they must spread compliance costs across a smaller average transaction size.

The impact of these regulatory changes is already visible in the market. Recent data shows a 33.5% increase in new loans advanced to older borrowers in Q1 2025, with the value of this lending increasing by 42.6% compared to the previous year. This trend highlights how regulatory shifts can create new market opportunities for lenders with the right technology infrastructure to efficiently serve emerging segments.

ESG Integration in SME Lending: Impact on Risk Assessment and Loan Pricing

Environmental, Social, and Governance (ESG) considerations are becoming increasingly integrated into SME lending decisions, driven by regulatory changes and investor demand for sustainable practices. This trend is reshaping risk assessment models and loan pricing strategies in ways that create both challenges and opportunities for lenders targeting the SME market.

The Reserve Bank of India has launched draft guidelines for climate risk and opportunities assessment for banks, a significant milestone in the journey towards climate resilience in the financial sector [29]. Similar regulatory developments are expected in the UK, requiring lenders to incorporate climate and broader ESG risks into their credit assessment processes.

The European Banking Authority (EBA) is considering developing a framework for lenders to issue synthetic risk transfers on loans specifically related to green projects [30]. This initiative, which may begin next year, could create new opportunities for lenders to finance ESG-focused SMEs while managing risk effectively through securitisation structures.

These regulatory developments are driving changes in how lenders approach ESG integration in their risk assessment models. Financial institutions are increasingly recognising that traditional financial metrics alone do not adequately account for the full range of risks and opportunities associated with lending decisions.

The practical impact of ESG integration on loan pricing and availability varies across market segments. For SMEs with strong ESG credentials, particularly those in sectors with significant environmental impacts, this trend can create access to preferential financing terms. Conversely, businesses in carbon-intensive industries or with governance concerns may face higher borrowing costs or limited access to certain funding sources.

Lenders targeting the SME market need loan management systems capable of capturing, analysing, and reporting on ESG data points. This technological capability is becoming increasingly important as regulatory requirements evolve and investors demand greater transparency on the ESG characteristics of loan portfolios.

Competitive Dynamics Between Traditional Banks, Debt Funds, and Specialised SME Lenders

The concentration of capital in large debt funds targeting big deals has fundamentally altered market dynamics, creating a competitive vacuum in SME lending. Private credit's share of large LBO finance reached 34% in recent years, climbing to a record 54% by 2023 [6]. Meanwhile, fundraising for direct lending funds rose to $120 billion globally last year, the second-highest total on record.

An analysis of closed-end private debt funds shows 84% of capital raised last year came from funds exceeding $1 billion, a record high [6]. This concentration of capital in large funds further exacerbates the SME financing gap, as these institutions must deploy significant amounts of capital through large transactions to meet their return objectives.

This presents a strategic opportunity for specialised lenders with efficient loan management systems to establish dominant positions in the sub-£75 million market, particularly as traditional banks remain constrained by regulatory pressures and large debt funds focus exclusively on bigger transactions.

The competitive environment is further evolving through strategic partnerships between banks and private credit firms. Major banks are forming partnerships with private credit firms to enhance their offerings in the alternative lending sector, addressing the demand for private capital in underserved markets.

kennek's end-to-end lending platform offers a solution for lenders targeting this market opportunity. By combining automation, real-time data, and flexible API infrastructure, the platform enables lenders to streamline every stage of the lending lifecycle, from origination to servicing and reporting. This technological foundation allows lenders to efficiently manage larger portfolios of smaller loans while maintaining appropriate risk controls and compliance standards.

Conclusion: Bridging the Gap Through Technology and Specialisation

The widening SME funding gap created by debt funds' shift toward £75 million-plus deals represents both a significant market challenge and a strategic opportunity. While SMEs struggle to access the capital they need for growth, specialised lenders with efficient loan management systems can profitably fill this gap.

Success in this market requires a combination of sector expertise, technological innovation, and operational excellence. Lenders must leverage advanced loan management platforms that enable efficient origination, servicing, and monitoring of smaller loans at scale. Those who can effectively balance automation with human expertise will be well-positioned to capture market share in this underserved segment.

The evidence from early adopters demonstrates the transformative potential of advanced technology. Fenergo's 93% reduction in operational costs and SWIG Finance's ability to scale to over 480 loans worth £8.2m showcase how the right systems can fundamentally change the economics of SME lending.

Looking ahead, ESG considerations will continue to grow in importance for SME lending decisions. As regulatory frameworks evolve and investor preferences shift toward sustainable investments, lenders will need to adapt their risk assessment models and loan pricing strategies accordingly. Those with the technological infrastructure to efficiently incorporate ESG factors into their lending processes will have a competitive advantage in this evolving market.

As the lending environment continues to evolve, the most successful institutions will be those that can adapt to changing market dynamics, navigate regulatory complexities, and leverage technology to deliver efficient, tailored financing solutions for SMEs. By addressing this critical funding gap, these lenders can not only drive their own growth but also support the broader economic development that depends on a thriving SME sector.

Our Opinion

We observe a fundamental shift where large capital pools are concentrating on bigger transactions, inherently creating a significant financing gap for small and medium-sized enterprises. This isn't merely a market anomaly; it's a structural reality driven by the need to deploy substantial funds efficiently. The critical challenge for lenders looking to serve this vital segment is the operational cost associated with managing a higher volume of smaller loans. Our analysis shows that legacy systems, designed for simpler times or larger deals, simply cannot deliver the efficiency required to make sub-£75 million lending profitable at scale. Bridging this gap demands a technological foundation that fundamentally changes the unit economics of lending.

From our perspective, success in this market hinges entirely on operational excellence powered by integrated technology. We believe lenders must adopt end-to-end platforms that automate workflows, provide real-time data for risk assessment and monitoring, and seamlessly handle evolving regulatory and ESG requirements. This level of technological sophistication is not a luxury; it is the necessary infrastructure for specialised lenders to manage portfolios efficiently, maintain robust risk controls, and capitalise on the substantial opportunity left by larger players. It's about enabling profitability and scale through precision engineering of the lending process.

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