After the general financial challenges and uncertainties of 2020 and 2021, many business owners hoped that 2022 would be a year of stability. Whilst some businesses have flourished, others continued to struggle in the face of inflation and the threat of a recession. Difficulties beyond the control of individual businesses (such as difficulties within supply chains, labour shortages and the rise in energy bills) have resulted in further challenges that have, in many cases, prevented that stability.
The collapse of the Silicon Valley Bank (SVB), and the consequences of that for UK-based SMEs, particularly those early-stage businesses in the tech sector, have been much talked about in recent weeks. After an initial period of panic for those companies that banked with the UK arm of SVB (SVB UK), its swift rescue by HSBC UK provided some immediate relief with customers at least able to ‘bank as normal’. Anecdotally, future prospects for those businesses affected by these events are positive. Within our networks we are seeing offers of support from other lenders. OakNorth, a potential suitor for SVB UK, have been fairly proactive and we also hear similar messages from Barclays (who have invested in their own proposition for early-stage tech businesses). Over a period of time, we would also expect there to be a natural rationalisation as SVB UK customers consider their options. Alternative platforms such as Revolut and Wise also see to be making positive noises.
The good news is that the outlook in 2023 is brighter for small business owners in most sectors. Those in consumer industries perhaps face more challenges than others, particularly due to the cost-of-living crisis. which is having a direct impact on their cash flow as customers have less money in their pockets to spend. Generally, though, the feeling is that SME owners who operate in other parts of the economy are feeling optimistic about their prospects this year.
Many SMEs that were able to access capital via the various government-backed schemes during the pandemic are now repaying those loans or looking to refinance them. Increasingly, those businesses that are finding themselves in calmer waters will be looking to finance on business-as-usual terms, rather than for survival. The challenge becomes what now constitutes ‘business as usual’. Therefore, it remains understandable that finance providers are still exhibiting caution when considering deploying more capital unless there is a very robust business case for it.
Those SME owners that are looking for funding this year should be taking steps now to ensure that their businesses are in the best possible shape to support a case for finance. Whilst the high street banks remain cautious as the legacy of the last few years plays out, there does appear to be appetite to lend to good-quality businesses.
As has long been the case, those SMEs with multi-faceted funding requirements (such as working capital, invoice discounting, asset-based funding and/or trade finance), will likely find that the high street banks remain the most appropriate funding partners. That said, we are seeing some diversification in the market with funders of different types being more willing to work together as part of a package.
Some SME owners who are still facing challenges within their businesses, be they related to COVID, Brexit, inflation, or otherwise, may find that alternative funders are a more appropriate funding partner for them. These funders tend to have more flexible credit policies than the high street banks. Additionally, businesses looking for a solution to simple cash-flow issues or looking to invest in specific equipment to facilitate growth, may find that they are more suited to specialist funders that can provide these facilities.
Whilst banks are displaying an increased appetite to lend, not all SME owners have the appetite to borrow. With finance offers to SMEs often (but not always) being priced as a margin over base rates, debt is more expensive than it has been for many years due to the continual rise in the Bank of England’s base rate. In many respects, the challenges for SMEs are not dissimilar to those that each of us face as individuals. The uncertainty around what the debt will end up costing them may be too much of a risk for some business owners and in turn may prevent them from embarking on future growth at the moment.
SME owners should bear in mind that there may be potential alternatives to debt finance available to them. Equity investment is an option and increasingly we’re seeing finance packages combining debt with an increased expectation of equity. As with banks, the equity providers are being selective who they deploy the capital to and are expecting business owners to stand behind their businesses and maintain skin in the game.
There was the usual flurry of transactional/deal-based activity in the lead up to the Spring Budget as business owners rushed to get things done before any changes were announced. In actual fact, the Budget didn’t contain any of the big CGT shocks that business owners were fearing. Overall, there was little for most SMEs unless they are operating within the science and technology sectors, which tend to be heavily dependent on research and development. The announcement of an enhanced tax credit for SMEs will be welcomed by these business owners, particularly in light of the cuts to SME R&D tax reliefs that are being introduced in April.
The package of business incentives to help SMEs offset the rise in corporation tax will be welcomed by many business owners. Views of the Budget will vary depending on, amongst other things, personal politics and the sector being worked in, but there seems to be a desire to encourage people to return or remain in the workplace and on growth within the economy. Time will tell whether the announced changes promote the growth that is hoped for.
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