September 22, 2026 | NCFA Story Intelligence | SME Finance And Business Banking, Open Banking And Open Finance, Capital Formation, Competition And Market Structure
Why High Approval Rates Still Hide SME Financing Friction
On September 17, 2026, the UK regulator went looking for evidence that its own rules were blocking small business finance.
It didn't find much.
Instead, the FCA SME finance review found problems scattered across the financing process. Some small firms don't know which product fits. Applications can be repetitive. Valuable businesses can own little conventional collateral. A lender can say no for reasons that have more to do with its own risk appetite than the health of the company. And after a decline, the entrepreneur may be left wondering where to go next.
Canada looks different at first glance.
Small business debt approval reached 97% in 2025.
That is a strong number. But approval is only one part of the financing process.
Why is the Competition Bureau reviewing SME lending, why did 76% of borrowers still have to pledge collateral, and why are specialist lenders building financing products around needs that conventional credit doesn't always serve?
The problem may not be a simple shortage of money.
It may be what happens between a viable SME and the right capital at the right stage of its life.
The UK expected to find regulatory barriers. The FCA concluded that its regulation was not a major obstacle to SME finance. What surfaced instead were problems with finance readiness, market navigation, risk assessment, repeated customer checks, product availability, alternative lending and personal guarantees. SMEs account for 60% of UK private sector employment, yet only 21% of the value of UK business loans goes to them.
Canada starts from a much stronger approval number, but fewer firms enter the debt market. ISED's 2025 Credit Conditions Survey found that 20% of small businesses requested debt and 97% received full or partial approval. Ninety seven per cent of requested dollars were authorized. The average amount approved was C$140,148 and the average interest rate fell to 5.8%. In the UK, around 50% of smaller businesses used external finance in Q3 2025, while challenger and specialist banks supplied 60% of gross SME bank lending. The measures aren't directly comparable because the UK figure includes credit cards, overdrafts, leasing and other products. Still, the UK data show SMEs using a wider range of external finance, alongside a market where challenger and specialist banks now provide 60% of gross SME bank lending. That makes Canada's 20% debt request rate worth looking at more closely.
The Problem Starts Before Approval2025 to 2026
A 97% approval rate sounds like the problem is almost solved. It isn't. Only one in five Canadian small businesses requested debt in 2025, while UK firms use external finance much more widely across loans, overdrafts, cards, leasing and other products. The measures differ, so this isn't an approval rate comparison. It does make the Canadian funnel worth looking at more closely. Approval tells us about businesses that make it into the credit process. It says much less about the founder who can't find the right product, decides a C$60,000 application isn't worth weeks of effort, lacks conventional collateral or never applies because the available financing simply doesn't fit.
Who never reaches the approval number
Most Canadian firms that didn't seek financing in 2025 genuinely said they didn't need it. That was 83% of non applicants, so operating without external capital should not automatically be treated as a market failure.
The smaller groups are still revealing.
Six per cent didn't know what financing sources were available. Seven per cent considered financing too expensive. Two per cent found applying too difficult or time consuming. One per cent expected to be turned down.
Age makes the picture more interesting. Businesses operating for less than five years requested debt at a 40% rate, twice the 19% rate among businesses over ten years old. Their approval rate was lower at 90%.
Innovative firms also requested debt more frequently than firms classified as non innovators, while their approval rate was lower.
The financing funnel therefore begins before a lender ever approves or rejects a loan.
Questions worth watching
How many viable firms never apply because the available product doesn't fit?
How many owners delay investment or fund the business personally instead?
Would better navigation bring more suitable borrowers to more suitable lenders?
The loan gets smaller. Much of the work doesn't. A lender still has to identify the customer, understand the business, assess risk, collect financial information, document the facility and service the account. The FCA found that high underwriting and customer support costs can make smaller or more complicated loans commercially unattractive. Bank of England research cited in the review found that operating and impairment costs mattered more than capital requirements in explaining weaker returns on SME lending.
Smaller firms can end up trying to fit products built for someone else. A bank can justify the time needed to structure a large commercial facility. The economics get harder when the business needs C$50,000 or C$100,000 and wants an answer quickly. David Gens, Founder and CEO of Merchant Growth, described that mismatch in a recent NCFA Fintech Fridays conversation. Merchant Growth has since funded more than 15,000 Canadian small businesses and deployed over C$1.5 billion, building around smaller financing needs and current business performance.
A Good Business Can Still Be The Wrong FitProduct Fit
Maybe the company needs C$75,000 instead of C$750,000. Maybe sales are healthy but uneven. Maybe the money has to arrive before inventory is paid for or receivables are collected. Maybe there isn't much physical collateral to pledge. Being awkward for a standard loan product is not the same thing as being a bad business.
Collateral still carries enormous weight. In 2025, 76% of Canadian small business borrowers had to pledge collateral. The requirement reached 93% for long term debt. Buildings, machinery, inventory and receivables give lenders assets they can value and potentially recover if the borrower fails.
A fintech can become more valuable without owning much more that a lender can seize. Revenue rises. Customers renew. Software improves. Proprietary technology becomes harder to replicate. Yet BDC notes that patents and intellectual property can be harder for banks to value, making financing more difficult for businesses such as SaaS, ecommerce, cleantech and media companies.1
IP Value Does Not Automatically Become Borrowing PowerIP Rich Firms
This is where a fintech can look very different depending on who's looking at it. An equity investor may see valuable software, proprietary data, customer relationships, patents and future revenue. A lender also has to ask what those assets are worth if the company fails. Enterprise value and collateral value aren't always the same thing.
Why valuable intellectual property can still be hard to finance
Canada doesn't ignore intellectual property.
The problem is turning IP into something lenders can value consistently, secure legally and recover predictably.
Software, patents, proprietary data, algorithms, trademarks, designs, licences and know how can create substantial economic value. But a lender considering a secured loan has to answer uncomfortable questions. Who would buy the asset if the company failed? Does the IP retain value without the people who created it? How transferable are customer contracts? How much would a distressed sale actually recover?
Real estate and standardized machinery generally produce clearer answers.
This gap is especially relevant to Canadian fintech and technology companies because their strongest assets can grow faster than the pool of conventional collateral sitting on the balance sheet.
The gap is central to Canada Values IP But Capital Still Falls Short. Canada already has IP strategy programs, financing experience and specialized expertise. The challenge is making valuation, underwriting and recovery repeatable enough that IP financing doesn't have to become a custom project every time.
Questions worth watching
Can standardized IP valuation reduce the cost of underwriting smaller companies?
Can guarantees absorb part of the recovery risk where the underlying business is strong?
Can recurring revenue carry more weight when hard collateral is limited?
Can lenders build enough default and recovery data to make IP financing less bespoke?
Canada has already decided to share some of that lending risk. The Canada Small Business Financing Program supported 6,409 loans worth almost C$1.9 billion in 2024 to 2025. Startups and businesses operating for less than one year received C$1.4 billion, or 74.1% of the total.
Follow the money and the old lending logic is still visible. Leasehold improvements accounted for C$1.2 billion and equipment another C$350.9 million. Working capital and intangible asset loans together represented only C$51.5 million, or 2.7% of program lending.
Canada Is Taking More Risk. The Mix Still MattersPublic Finance
The programs aren't standing still. Working capital and intangible assets can qualify. Lines of credit were added. Public risk sharing already helps younger firms borrow. Yet usage remains heavily concentrated in assets lenders know how to secure. The rules have widened faster than the financing mix has changed.
Revenue gives the lender something else to watch. BDC now says technology financing can take recurring revenue such as ARR and MRR into account. Predictable subscription revenue can help demonstrate repayment capacity even when profitability is still developing.2
The public guarantee can follow the loan through someone else's front door. BDC's Business Accelerator Loan Program supports working capital facilities between C$25,000 and C$500,000. The participating financial institution originates and manages the loan while BDC guarantees it.
Financing Should Grow With The BusinessLifecycle
The first facility might be C$25,000. Customers arrive and C$75,000 makes more sense. Revenue keeps climbing and the company needs C$250,000 for payroll, inventory or expansion. Later it may need equipment finance, growth debt or equity. The business keeps changing. The financing relationship should be able to change with it.
Where the financing need changes
A founder at the beginning may need a small operating facility, startup capital or a government backed loan.
Once customers begin paying regularly, the lender has something new to work with. Bank flows, card receipts, invoices, receivables and recurring subscription revenue start to create an operating history.
As the company grows, it may need a revolving facility rather than another fixed loan. A manufacturer may need inventory finance. A professional firm may need receivables financing. A SaaS company may need capacity tied to recurring revenue. Another business may need equipment that can support its own security.
Eventually debt stops being the complete answer. A company investing heavily in R&D, entering new markets or scaling before cash flow catches up may need venture capital, growth equity or other patient capital instead.
The friction appears when every new stage feels like a new financing relationship.
The business has already spent years proving who it is. Ideally, that history should become an asset rather than disappear each time the company needs a different product.
The UK is trying to make business information do more work. The FCA sees open finance as a way to give lenders more complete and timely information, reduce duplicated applications and improve decisions. SME lending is one of the UK's first priority open finance use cases. The FCA plans to publish options for its first open finance scheme in early 2027.
Canada sees the same lending opportunity in consumer driven banking. Budget 2025 says the framework can reduce administrative work for SMEs, connect banking information with accounting, tax and payroll tools, support faster loan decisions and provide access to new forms of financing.3
Business Data Can Become Credit InfrastructureOpen Finance
For an SME, the useful part of open banking isn't another dashboard. It's proving revenue, cash flow and financial health without rebuilding the same file for every lender. For the lender, the payoff is different. Better data can make a small loan cheaper to assess.
How reusable business data changes the lending economics
A C$75,000 loan can become expensive to originate when an analyst has to chase bank statements, tax information, ownership records, invoices and financial statements manually.
Permissioned business data can change that equation.
Before applying, the owner could see current cash flow and compare financing options using verified information.
During underwriting, the lender could receive bank activity, revenue data and other authorized records in a consistent format.
If another lender turns out to be a better fit, the borrower shouldn't necessarily have to rebuild everything from zero.
None of this removes the lender's responsibility to assess risk. It can remove duplicate collection, manual verification and unnecessary information cost.
Fixed administration costs hurt the economics of smaller loans first.
Then comes the moment a lender says no. The FCA heard that some SME borrowers receive limited explanations for a decline. That can be particularly frustrating when the problem is lender specific. A bank may simply have little appetite for the sector, ticket size or type of risk. The business itself may still fit another provider perfectly well.
Canada can still leave the borrower back at the original door. Under BDC's Business Accelerator Loan Program, the participating institution manages the credit decision. If the borrower is declined, BDC says it has no visibility into the reason and directs the entrepreneur back to the financial institution for more information.
A No From One Lender Shouldn't Mean Starting OverReferral
One lender's decline can mean many things. Wrong sector. Wrong ticket size. Wrong collateral. Wrong product. Wrong risk appetite. Canada doesn't need to turn every rejection into an approval. It needs a better way to separate a weak business from a business standing in front of the wrong lender.
What better routing could look like
The UK already has a Bank Referral Scheme that can direct declined SMEs toward alternative finance platforms. The FCA review makes clear that the system still has shortcomings, which is why reforms are underway.
If a borrower agrees, verified information already assembled for one application could help identify whether another lender, credit union, government backed program, community finance provider or specialist platform is a better fit.
The next lender would still make its own decision.
The SME simply wouldn't have to return to the beginning without knowing why the first application failed or whether another provider serves that type of business.
Better routing can increase competition without lowering underwriting standards.
Canada is now looking closely at competition in SME lending. The Competition Bureau is reviewing SME loan competition in Canada, including lender entry, expansion and switching. The Bureau says Canada's market is dominated by large banks, smaller lenders appear to face barriers, comparing offers can be difficult and the borrowing cost gap between SMEs and large firms is wider than in many OECD countries.8
Meanwhile, Canada is adding capital further up the financing ladder. Budget 2025 committed C$1 billion to a new Venture and Growth Capital Catalyst Initiative and another C$750 million toward businesses facing early growth funding gaps.4
The Friction Can Stack Before ScaleEarly Growth
There isn't one hardest stage for every company. A startup can struggle because it has almost no history. A mature SME can get trapped by switching costs. A scaleup can need patient capital that conventional debt can't provide. But the years between startup and scale are interesting because several problems can arrive together. Revenue exists. Capital needs are growing. Yet the company may still have limited collateral, a short history and a financing request too small to justify a custom commercial structure.
Manufacturers are already showing why timing matters. Only 87% of manufacturing applicants were approved for debt in ISED's 2025 survey, compared with 97% across small businesses overall. Now tariff pressure is hitting the same sector. Statistics Canada reported that 49.7% of manufacturers expected U.S. tariffs to hurt their business over the next 12 months, compared with 32.2% of Canadian businesses overall.5
Ottawa is responding with liquidity because the pressure arrives in cash flow first. The latest federal package adds C$1.5 billion to the Regional Tariff Response Initiative, a new C$500 million BDC liquidity stream for immediate cash flow pressure and another C$2 billion through the Canada Strong Diversification Fund.6
A Healthy Business Can Still Need Money FastTrade Pressure
A manufacturer doesn't have to be failing to run short of working capital. A tariff can raise material costs. Inventory may sit longer. A customer can push out an order. New suppliers may require different payment terms. The financing need can appear before the damage shows up in annual financial statements. That is when speed, product size and current operating data start to matter as much as the total amount of capital in the system.
The UK is fixing friction inside the financing process. Its response includes better finance navigation, reform of referral after a declined application, better commercial credit data, digital verification, Consumer Credit Act reform and open finance focused directly on SME lending.
Canada is building capacity from several directions. Public guarantees support smaller loans. BDC lends directly and through partner institutions. Consumer driven banking can improve underwriting. The Competition Bureau is looking at lender competition. Ottawa is adding venture and growth capital. Tariff programs are supplying emergency liquidity.
The Right Capital Has To Arrive At The Right Time2026
Canada doesn't lack lenders, public programs or investment capital. And the UK's approach isn't proof that Britain has solved SME finance. It hasn't.
The FCA report is useful because it changes where we look. Capital can exist and friction can still stop the right financing from reaching the right company at the right moment.
Where Canada can remove more friction now
Make smaller loans cheaper to originate. The economics improve when more financial information can arrive digitally, in a consistent format and with the SME's permission.
Let financing capacity rise as the business proves itself. Growing revenue, recurring contracts, receivables and transaction history can become reasons to increase a facility instead of waiting for more physical collateral to appear.
Make IP easier to finance. Canada already recognizes the problem. More consistent valuation, better recovery data and targeted public risk sharing could help lenders use intellectual property without pretending it behaves like real estate.
Stop making the SME repeat itself. Reusable identity, ownership and financial verification can reduce the cost of applying to another provider.
Make a decline more useful. Tell the business enough to understand what happened and, with permission, make it easier to find another lender whose product and risk appetite are different.
Keep debt and equity connected to the lifecycle. A company that outgrows a small operating loan shouldn't have to fall through a gap before it becomes large enough for institutional growth capital.
These aren't arguments for lowering credit standards.
They are arguments for making good credit cheaper to identify and easier to match.
Canada's SME finance numbers don't describe a credit desert. A 97% approval rate makes that clear.
A small business can have customers, revenue and a good reason to borrow and still be the wrong size for a lender's economics. A fintech can build valuable intellectual property faster than it builds conventional collateral. A manufacturer can suddenly need working capital because tariffs change its cash cycle. And a company that grows from C$25,000 of financing to C$250,000 can find itself proving the same business all over again.
Canada is already working on many of these problems. That's important. The opportunity isn't to replace banks, BDC or existing programs with one new solution.
It's to make the financing relationship itself work better as the SME changes.
Current business data can lower underwriting cost. Public guarantees can make smaller loans practical. Intellectual property can become easier to finance when valuation and recovery evidence improves. Consumer driven banking can help verified information travel. Specialist lenders can serve needs that large institutions aren't structured around. Growth equity can take over when debt stops being the right answer.
Put those pieces together and the financing process starts looking like a relationship that grows with the company (not disconnected and fragmented).
And for someone's sake, SMEs shouldn't have to become the wrong kind of business just to fit the available loan.
Talking Point
If a Canadian SME keeps proving itself through stronger revenue, better cash flow, customers and intellectual property, why should its financing relationship have to start over every time the business reaches a new stage?
FAQs
Do Canadian SMEs have trouble getting loans?
Not across the board. ISED reported a 97% full or partial approval rate among small businesses that requested debt in 2025. Friction can still appear through collateral requirements, application cost, product fit, lender specialization, financing size and businesses that never enter the application process.
Why is intellectual property harder to finance?
Software, patents, proprietary data, brands and other intellectual property can create considerable enterprise value. They can also be harder to value, transfer and recover than buildings or machinery. That can reduce their usefulness as conventional loan collateral even when they are central to the company's value.
How could consumer driven banking help SME lending?
Permissioned business data could give lenders a more current view of revenue, cash flow and account activity while reducing repeated document collection. Lower information and verification costs are particularly valuable for smaller loans, where fixed underwriting costs consume a larger share of the economics.
Where does SME financing friction appear most strongly?
There is no single hardest stage for every SME. Early growth is particularly interesting because revenue and financing needs can rise before a company has accumulated substantial collateral, a long financial history or access to larger growth capital markets. Several forms of friction can therefore arrive at the same time.
What can Canada do after an SME loan is declined?
A decline could provide clearer reasons and, with the business's permission, better routing toward another lender or financing program. Different lenders have different sector appetites, ticket sizes and underwriting models. A rejection from one provider does not automatically mean the business cannot be financed.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit www.ncfacanada.org
Canada’s 97% SME debt approval rate looks strong, but friction remains around collateral, smaller loan economics, intellectual property, lender fit, business data and financing that grows with the company.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit www.ncfacanada.org
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