Working capital funding – The worrying rise among SMEs of finance used for day-to-day operations

A recent report from Purbeck highlighted a concerning trend among SMEs: more than a third of loans agreed in October 2025 were used to support day-to-day cash flow.

This marks a worrying shift in how businesses are using credit, with working capital loans increasingly relied upon to manage immediate financial pressures rather than longer-term growth.

Barclays’ latest index reveals that over half of SMEs have paused spending due to weakening confidence, while insolvency rates continue to climb, with more than 3,700 companies entering compulsory liquidation in December 2025.

These figures reflect the mounting pressure businesses face from rising costs and ongoing economic uncertainty. For many, the focus has shifted from expansion to merely maintaining daily operations.

Growing reliance on borrowing for daily operations

The levels of borrowing by SMEs are on the rise, with average loan values now significantly higher than last year. Q3 2025 data shows an increase of more than 40 per cent, with typical loans approaching £300,000.

Newer businesses, in particular, have experienced an even sharper rise in borrowing, with average loan values increasing by more than 60 per cent. Alongside this, a growing reliance on personal guarantee-backed loans has left many business owners personally exposed.

With confidence fragile in the current UK economic climate, this raises concerns about the long-term impact on personal and business finances.

The benefits and risks of working capital loans

Working capital loans offer businesses a lifeline during times of financial strain, helping them cover essential costs like wages, supplier payments and overheads.

When used strategically, these loans can prevent disruption to operations, particularly during seasonal dips or when awaiting late payments.

However, these loans are most effective when they support planned, clear business decisions rather than acting as a short-term fix for urgent issues.

Businesses should be cautious when turning to working capital loans, as reliance on such finance for routine operations can become a dangerous cycle, particularly when broader economic conditions remain uncertain.

A sign of the times, but a useful tool if managed well

The rise in working capital loans among SMEs is a clear indicator of the pressure businesses are facing.

While these loans can be a useful tool for managing cash flow and keeping operations stable, they must be approached with caution.

When used responsibly and strategically, they can provide breathing room and allow businesses to plan for the future. However, it is essential for business owners to carefully consider the wider financial strategy before taking on new borrowing.

How can we help

Before pursuing new finance, businesses should seek professional advice to ensure it aligns with their long-term goals and doesn’t leave them over-reliant on debt for daily operations. For advice on capital funding, please get in touch with our Corporate Finance team for a confidential discussion.

FAQs

It can be, particularly if a business becomes reliant on short-term borrowing to cover routine costs. While working capital loans can provide short-term relief, they should form part of a wider financial strategy rather than a permanent solution.

Working capital loans can be suitable for UK SMEs experiencing temporary cash flow pressure, seasonal fluctuations or delayed customer payments. Suitability depends on the business’s overall financial position and repayment capacity.

Many working capital facilities, particularly for smaller or newer businesses, may require personal guarantees. This can expose business owners personally, so it is important to fully understand the risks before proceeding.