High-cost lending is becoming a major problem for small businesses and the wider economy.
In September there was some great reporting by Jess Jones, in The Times, on the important issue of how the decline of traditional, high street, business lending has led more firms to seek out quick-fix, high interest loans – often to their longer-term detriment.
How do businesses fall into a high-cost lending spiral?
To summarise, the problem goes like this:
Businesses need working capital – usually for three main reasons:
- Trading conditions are tough – sales are down, margins are down and cash income is down. Additional working capital is needed to pay the bills
- An unplanned capital expense – a tax bill, machinery breakdown etc
- The business is growing – more kit, more staff, more space
Whatever the reason, the need for cash is very often urgent and options are limited.
For speed, Business owners search online and find fast loan solutions – money often available within 24/48 hours
The purpose of the borrowing is short-term (less than 12 months) but the loan is taken over 5 years or more. Then, six months later, something similar occurs and another loan is taken.
Servicing the loan repayments becomes unsustainable, leading to debt stacking, where people get more high-cost finance to pay off existing loans, leading to a dangerous and stressful debt spiral.
They realise, too late, they could have borrowed the money, at a less severe interest rate, from a Community Development Finance Institution, such as Business Finance Cumbria.
How Business Finance Cumbria can help
As an organisation that has loaned over £2m to more than 30 businesses this financial year, this is a pattern which we see in most of the businesses we speak to.
Alternative lenders have, ironically, become the norm for many SMEs, as banks have reduced their small business lending. Research shows that only 5% of new credit issued by banks comes in the form of overdrafts – traditionally the most common form of working capital.
As The Times article points out, challenger banks accounted for 60 per cent of lending to smaller companies last year as old fashioned, face-to-face communication between a business owner and the bank manager has all but disappeared.
Tragically, many businesses are simply not aware they could have accessed the funding they needed via an organisation like Business Finance Cumbria at similar speed but at a much lower cost.
So, what are some of the solutions to this problem?
Sitting down with an experienced business lender and looking at the purpose of the borrowing is vital. The type of finance has to match the purpose. Pulling the wrong finance lever can result in far higher costs and fees and problems later.
However, it is clear that a wider knowledge and understanding of CDFIs like ours could help firms avoid debts which can, at worst, lead to default and insolvency. This is not just down to business owners, but the accountants and other advisers who work with them.
We know from personal experience how much difference awareness can make.
Earlier this year we rebranded as Business Finance Cumbria – making a very clear statement about what we do. This simple change, along with the hard work of our team, has driven a record amount of lending in 2025/26.
It is clear there is a high demand for no-nonsense, quick financial solutions. We are on a mission to ensure that owners, accountants and advisers come to us first, rather than taking high-cost routes which could lead to serious difficulties for businesses.
If you are interested in finding out how Business Finance Cumbria can help your business, contact the team by emailing [email protected] or calling 01768 867118.