04 Sep 2025
By Craig Darling, Partner, Corporate at Gilson Gray.
Scotland’s SME sector has shown impressive resilience over recent years. However, for lenders, particularly challenger banks, alternative funders and asset-based lenders – 2026 will be critical in balancing opportunity with risk.
The end of government support schemes has exposed the underlying pressures many businesses are facing: ongoing cash flow constraints, elevated input costs, legacy debt burdens and a persistently difficult economic environment. In this climate, the role of responsive, flexible finance providers has never been more important.
Official insolvency statistics in Scotland continue to show a gradual rise in corporate failures. Many owner-managed businesses are choosing to close voluntarily, recognising that they can no longer manage rising costs and historic debt obligations. Sectors such as hospitality, retail and construction remain under particular pressure, driven by energy price volatility, labour shortages and shrinking margins.
For non-traditional lenders, the current environment presents a notable gap between demand for funding and SMEs’ ability to access it through conventional banking routes. Tighter credit conditions, increased regulation and higher interest rates have left many Scottish businesses unable to refinance or extend borrowing with high street banks.
This situation presents both a challenge and an opportunity for alternative and asset-based lenders, but one that requires careful navigation.
Alternative lenders have already filled much of the void left by traditional banks. Demand for invoice finance, asset-based lending, and tailored working capital facilities remains high as businesses look to manage uneven cash flows, seasonal trading cycles and overdue receivables.
However, the rise in insolvency cases means greater scrutiny is required. Directors are increasingly acting early when businesses become unviable, often initiating voluntary wind-ups before debts or liabilities escalate. In these scenarios, asset recoveries can be limited unless security has been properly structured and monitored.
Asset-based lenders, in particular, must remain vigilant. Assessing the real quality and recoverability of assets – whether receivables, inventory, plant or machinery – is key to minimising downside risk. Facilities should be structured conservatively, with a strong focus on covenant protection, collateral control and exit visibility.
Insolvency levels in Scotland are likely to remain elevated. While inflation may soften, core input costs will continue to squeeze margins. Many SMEs are still servicing Bounce Back Loans and CBILS borrowings, which further deplete working capital and leave little room for error.
However, where businesses remain fundamentally viable, well-structured funding can provide the breathing space needed to stabilise, restructure or even pivot. There are also likely to be opportunities for distressed acquisitions, refinancing of legacy debt, and turnaround financing all areas where alternative funders are well placed to support recovery, provided appropriate controls are in place.
Lenders should focus on early engagement with borrowers. Missed payments, covenant breaches, or pressure from trade creditors are all warning signs that should trigger immediate dialogue. In many cases, timely intervention can avoid a deterioration in value and support a structured workout or refinancing solution.
Where insolvency becomes inevitable, clear enforcement plans, robust documentation and swift action are essential to protect and maximise recoveries. For asset-based lenders, understanding the realisable value of collateral and moving quickly to take control where necessary can make a significant difference to outcomes.
At Gilson Gray, we advise a wide range of challenger banks, alternative funders and asset-based lenders across Scotland. Our specialist restructuring and insolvency lawyers work closely with lenders to:
If you are reviewing your Scottish lending portfolio or have specific borrower concerns, we are here to help you protect your position and navigate the current market with confidence.
To discuss any of the points raised further, please contact a member of our Insolvency law team here.
