Short term business finance can solve a cash flow gap or quietly become a costly habit. David Farmer explains how the cycle starts, how to spot it, and how to get out.
Around half of UK smaller businesses now seek external finance, and use of flexible, short-term facilities rose again last year. That is from the British Business Bank’s Small Business Finance Markets Report 2026, published in March. On the face of it, that is a good news story. More choice, more lenders, more businesses getting funded.
But there is a second story underneath it, and it is one I see in the paperwork far more often than I would like.
Usually short term business finance is a facility to cover a gap. Sensible enough. Then it takes another one to cover the repayments on the first. Eighteen months later, the facility isn’t bridging anything. It has become part of how the business runs. That is a very different situation, and it is much harder to fix than the original problem ever was. It seems to be one of those things that suddenly becomes a cycle, and each time that cycle happens it is harder to exit it.
I want to say this plainly, because businesses in this position often feel a bit foolish about it. They shouldn’t. The conditions that produce this outcome are baked into the market.
The first is the retreat of relationship banking. When I started out, a lending decision involved a person who knew your sector, knew your trading cycle, and understood why your March figures always looked worse than your June ones. Crikey, back in the day (I hate that cliché) I remember doing finance with seasonal payments! Now a great many applications are scored by an algorithm. If your business doesn’t fit the model, you get declined – not because you’re a bad risk, but because you’re an unusual one. And a declined business turns to whoever will say yes.
The second is that most business owners are not finance professionals, and they are making these decisions under real pressure. When one lender promises a decision in four hours and money in twenty-four, and the alternative involves gathering three years of accounts and waiting a fortnight, convenience wins. Not because it’s better. Because it’s Tuesday and the wages go out Friday. I get it.
Add in late payment, which the FSB has consistently found leaves small firms chasing money they’ve already earned, and the pressure is obvious. Around 38% of businesses say they’ve leaned more heavily on short term business finance in the past year just to manage cash flow.
Here is the bit that does the damage, and it is structural rather than moral.
Most short term business finance facilities are repaid over weeks. Most businesses operate on cash cycles measured in months. Those two things don’t line up. So when the repayment falls due before the money from the work has landed, there is only one easy option: refinance.
And each time you refinance, the terms get slightly worse. The balance sheet has more debt on it, the options narrow, and the price of the next facility reflects that. It’s a ratchet. Nobody makes a single catastrophic decision – they make a dozen reasonable ones in a row, each of which makes the next one harder, and off we go on the cycle.
Short term business finance borrowing is a bit like taking a taxi to the airport. Perfectly sensible when you’re running late and the trip is short. But if you’re still in the taxi three months later, something has gone badly wrong with the plan. That said, with drop-off charges at Gatwick these days even a taxi can be a bad idea…
Short term business finance has a place, a purpose and offers real benefits, but I am a broker who makes a living from raising finance for clients, and I’m suggesting that it is horses for courses – too often businesses use short term business finance in the wrong place or for the wrong purpose. Plenty of brokers love the refinance cycle, it’s a great income generator but isn’t always right for the client – and that’s the bit that should count.
“The question I ask isn’t ‘how much do you need?’ It’s ‘what does your funding look like in three years?’ Nobody sets out to build a business that runs on emergency money. It happens because each individual decision made sense at the time and nobody stood back to look at the shape of the whole thing.” – David Farmer, Lime Finance Solutions
This is the part worth knowing, because a lot of business owners are working from a picture of the lending market that is a decade out of date.
Gross SME bank lending rose 9% to £68bn in 2025 – the second highest figure in thirteen years, behind only the Covid peak. More importantly, challenger and specialist banks now account for 60% of that lending, up from 39% in 2012. Over two thirds of all SME lending last year came from challengers, specialists or non-bank lenders. Twenty-eight new providers have entered the market since 2013.
What that means in practice: the fact that your high street bank said no in 2023 tells you almost nothing about what’s available to you now. The lenders who understand your sector may not be the ones with a branch on the high street.
Sometimes we assume that alogorithms are bad, that isn’t always the case. Sometimes the algorithm can benefit you over a human being.
Rates matter too. The Bank of England held Bank Rate at 3.75% in June 2026, and in July. Nobody sensible is calling the direction with confidence – but for anyone sitting on high-cost short-term debt, the gap between what you’re paying and what properly structured borrowing costs is wide enough that waiting for perfect conditions is the expensive option. I’ve written before about why the “wait and see” approach often costs more than it saves.
If any of this sounds familiar, here’s how I’d approach it.
Work out your true cost of borrowing. Not the headline rate — the total cost across every facility, including fees, over twelve months. Most people who do this exercise properly are surprised, and not pleasantly. Our repayment calculator is a decent starting point.
Count your refinances. If you’ve rolled or replaced a short-term facility more than twice, you’re not bridging a gap any more. You’re funding the business with it. That’s a structural problem and it needs a structural answer.
Look at consolidation seriously. Pulling several expensive short facilities into one properly termed loan usually reduces the monthly cost and gives you breathing space. The Growth Guarantee Scheme can be used to refinance existing borrowing, which is a route a lot of businesses don’t realise is open to them.
Check who you’re taking advice from. A broker who is paid on volume and speed has different incentives to one who is paid to get the structure right. It’s worth understanding the fiduciary duty a broker owes you and asking directly how they’re remunerated. Any broker who bristles at that question has answered it. I don’t like dissing my own industry but it’s like any industry sector, you get the good and the bad – the bad tend to do a lot of work, the good struggle because honesty isn’t the best sales tool – but it is the right one. Is the broker FCA regulated? They may not have to be, but if you’re doing things right then why not?
If you own property, use it. A commercial mortgage or a secured revolving credit facility will almost always be cheaper than unsecured short-term money. Revolving credit in particular is the product most businesses never consider – it’s agreed in advance, sits there until you need it, and you only pay for what you draw. It is the difference between having a plan and having an emergency.
I left banking because I watched the system pull agreed facilities out from under people who had done nothing wrong. I especially remember a loft conversion company that were completing on a purchase where the bank pulled the facility last minute, it still sits with me. That experience shapes how I look at a funding structure now. I’m not interested in what a business can be talked into. I’m interested in what it can still be servicing comfortably in three years’ time, when conditions have changed again – because they always do.
Fast money has been a genuine good for businesses the banks wouldn’t touch. I won’t pretend otherwise. But speed should be one factor in a lending decision, not the only one. The businesses that come out of the next few years in decent shape will be the ones that treated short-term finance as a tool with a specific job, and made sure it went back in the box afterwards.
If you’re looking at your facilities and quietly wondering whether they’ve stopped being temporary, that’s usually a sign worth listening to. I’m always happy to have that conversation, and it costs nothing to have it.
David Farmer Lime Finance Solutions
Broadly, anything repaid within twelve months – merchant cash advances, revenue-based finance, short unsecured loans and bridging. It’s not a bad category of product. It’s a category that needs a defined job and a defined exit.
The simplest test: if you’re using new borrowing to meet repayments on existing borrowing, you’ve crossed the line. A second test is whether you could pause all short-term facilities for three months and still trade. If not, it’s structural.
No. Consolidation can lower monthly cost while increasing total interest if the term stretches too far, and some facilities carry early repayment charges. It’s worth modelling properly before committing. Often consolidating is part of the answer, not everything in its entirity.
Applications leave a footprint, which is one reason scattergun applying is a poor idea. A broker should approach the right lenders in the right order rather than testing the market with your credit file.
Usually, yes – and it can be by a meaningful margin. Secured lending prices are considerably better than unsecured, and lenders take a longer view when there’s an asset behind the borrowing.
Lime Finance Solutions is authorised and regulated by the Financial Conduct Authority (FRN 726314). We’re a credit broker, not a lender, and we’re paid commission by lenders – the model and amount are disclosed to you as we go. We also carry the NACFB’s Assurance Kitemark so you have even greater assurance.
Lime Finance Solutions is a trading name of Lime Coaching & Consultancy Ltd, authorised and regulated by the Financial Conduct Authority, FRN 726314. We are an authorised credit broker and not a lender. Always take independent legal advice before entering any credit agreement
Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.
Tel: 01293 541333
Email: hello@lime-fs.com
Tel: 0207 866 2102
Email: hello@lime-fs.com
Tel: 01293 541333
Email: hello@lime-fs.com
Tel: 0207 866 2102
Email: hello@lime-fs.com
ICO registration Z3450620 and you can check via ico.org.uk
‘Lime Finance Solutions’, ‘We are on your side’ and the ‘Lime tree logo’ are registered trademarks of Lime Coaching & Consultancy Ltd.
It is recommended that you always take independent legal advice before entering any credit agreement.
