2025 outlook: steady growth in asset finance in the UK, but SME lending lags
New finance business in the UK continued to show steady growth in 2024, with data from the Finance & Leasing Association (FLA) indicating a 4% year-on-year rise in the twelve months to October. Despite strong performances in commercial vehicle and business car finance, which saw increases of 8% and 5% respectively, lending to small- and medium-sized enterprises (SMEs) lagged behind, rising by just 1% compared to 8% for larger firms.
Lenders report that while the volume of new loans remains higher than a year ago, there are notable sectoral variations. According to Mike Conroy, Director of Commercial Finance at UK Finance, SME lending in manufacturing, transport, and storage has been particularly weak, reflecting the difficult trading conditions these sectors face. The situation remains far from pre-pandemic levels, with economic uncertainty exacerbated by the Labour government’s economic programme and the return of Donald Trump to power in the United States, which has introduced new trade tariffs.
Conroy anticipates a “static trend in new lending in the near term,” cautioning that business investment may be put on hold due to the economic outlook and fiscal measures introduced by Chancellor Rachel Reeves in her first budget. Meanwhile, Jason Hurwitz, European Sales Director at NetSol Technologies, foresees a shift in the credit appetite of both bank and non-bank lessors in 2025. Some operators are expected to tighten lending criteria or pause financing altogether as leasing returns come under pressure.
Reasons for optimism
Despite these challenges, there are some reasons to remain optimistic. Many SMEs have yet to fully understand the impact of tax changes and government policies, and these may create positive spin-offs. Conroy believes lending patterns will vary across different sectors, with some businesses adapting well to new economic conditions.
John Phillipou, Managing Director of SME Lending at Paragon Bank, remains positive about SME resilience. Paragon’s SME lending division saw 7.3% year-on-year growth in the financial year ending September 2024, with asset leasing volumes rising by 15.4% to £330.7 million.
Another significant area of focus is the increasing role of technology and sustainability in supporting SME finance. AI-powered credit application processes and green finance options for energy-efficient equipment and renewable energy projects are expected to be major growth drivers. Simon Goldie, Director of Business Finance at the FLA, highlights the importance of the net-zero transition, stressing that small and micro businesses will need government support to adopt sustainable finance solutions. He urges the government to signal its commitment to green finance initiatives, which would boost lender confidence in expanding their green finance offerings.
Economic prospects and key challenges
The broader economic outlook will play a crucial role in determining lending trends. According to HM Treasury’s December forecast, UK GDP is expected to grow by 1.3% in 2025, up from an estimated 0.8% in 2024. Private consumption and business investment are projected to rise by 1.5%, while inflation is expected to be 2.5% and the unemployment rate 4.5%.
However, inflationary pressures continue to challenge both households and businesses, impacting disposable incomes and profit margins. While many experts anticipate further interest rate cuts from the Bank of England, the trajectory remains uncertain. Phillipou warns that fiscal measures, such as increases in employers’ national insurance, could lead to inflationary pressures that may affect monetary policy easing.
Access to government support remains another issue for SMEs, with many businesses finding it difficult to navigate tax credit schemes for research and development (R&D). Conroy believes improving access to these schemes would significantly benefit SMEs seeking investment finance.
Goldie, meanwhile, is advocating for leasing to be included in the “full expensing” tax relief scheme, arguing that businesses should be able to claim 100% first-year allowance tax relief on leased plant and machinery. While the government has committed to reviewing this policy, no timeline has been provided for its implementation.
Green financing and technological developments
Green finance remains a crucial area for SME lending. The British Business Bank’s Growth Guarantee Scheme, which reached a £250 million lending milestone, has been instrumental in helping SMEs finance green assets such as solar panels and biomass boilers. Phillipou stresses the importance of transitional assets—those that are not entirely emissions-free but represent a step towards sustainability. As demand for green assets grows, economies of scale should help bring prices down, making sustainable investments more accessible to SMEs.
The automotive finance sector is also undergoing major transformations, with AI playing an increasing role in fraud detection and personalised customer service. Hurwitz predicts that 2025 will be a breakthrough year for autonomous vehicles, with the global market potentially reaching $50-100 billion. Up to 15% of new vehicles sold could include autonomous driving features, while car subscription models—offering flexible, pay-per-use vehicle access—are expected to account for up to 20% of the asset financing market.
Final thoughts
Despite economic uncertainties and sectoral challenges, the UK’s asset finance industry is poised for steady growth in 2025. While SME lending remains sluggish, technological advancements and green finance initiatives provide new opportunities for businesses seeking investment. Government policy and regulatory changes will play a key role in shaping lending trends, and collaboration between lenders and policymakers will be essential in ensuring that SMEs have access to the right financial products at the right time. With careful navigation of economic headwinds and strategic investments in sustainability and AI-driven financial solutions, the UK’s asset finance sector is set to remain a crucial driver of business growth in the coming year
