UK SME funding: approval rates and the true cost of alternatives

Getting a business loan from a bank has become much harder. Bank approval rates have fallen from around 80% before the pandemic to roughly 44% in recent surveys, so more than half of applications are now turned down, even as total bank lending to SMEs rose to about 68 billion pounds in 2025. When a business is declined and turns to a merchant cash advance instead, the cost jumps sharply: MCAs are priced as a factor rate, typically 1.1 to 1.5 with an average around 1.26, which works out at an effective APR of roughly 40% to 150% depending on how quickly the advance is repaid. The faster you repay a factor-rate product, the higher the effective APR, which is the opposite of an ordinary loan.

The approval squeeze

The British Business Bank's research shows bank lending to smaller businesses is still substantial, but it is concentrated on applications that clear tighter criteria. Approval rates that sat around 80% before the pandemic have roughly halved, so a business that would have been funded a few years ago can now be declined on the same numbers. That gap is exactly where alternative finance steps in, and where the cost can rise without the borrower realising.

Why a factor rate is not an interest rate

A merchant cash advance does not quote interest. It quotes a factor rate: borrow 10,000 pounds at a factor of 1.3 and you repay 13,000 pounds, whatever the timescale. Because the fee is fixed up front, repaying it quickly does not save you money, it compresses the same cost into a shorter period, which pushes the effective APR up. That is why the same product can equate to 40% APR or 150% APR depending purely on speed of repayment. Comparing a factor rate against a normal loan APR, not against another factor rate, is the only way to see the real cost.

How this is measured

The approval-rate trend and the gross SME lending figure are from the British Business Bank's Small Business Finance Markets Report and its Business Finance Survey, carried out by Ipsos across more than 1,500 smaller businesses. The merchant cash advance factor-rate range and the effective APR conversions are from published UK MCA market analysis; the APR is a worked conversion of the factor rate over typical repayment periods, not a quoted rate. Approval rates vary by lender, sector and business size, so treat the headline as the market direction rather than your odds. This is general information, not financial advice. Last reviewed June 2026.