Economic Headwinds & the impact on SME Growth

Reduced Access to Financing

Growth and the economy very much go hand in hand.

The availability of growth capital to SMEs can be influenced by the state of the economy and it is important for SMEs to be aware of economic trends that could impact their ability to secure funding.

In the current UK economic climate, accessing finance is becoming more difficult for a large number of SMEs, according to new data from the British Chambers of Commerce Insights Unit.
Around half (49%) of business surveyed who accessed finance felt that getting funding had become more challenging over the past three years. Only 13% said it was getting easier.

The BCC’s latest survey of business conditions also reveals that most (70%) of the 553 firms surveyed – mainly SMEs – have not accessed finance from an external provider in the past twelve months. Firms with more than 50 employees are more likely to have accessed finance (72%) compared to smaller firms (58%).

As businesses continue to struggle with a series of economic headwinds, the majority of respondents (51%) who sought finance said cash flow was the main reason.

Jonny Haseldine, Policy Manager at the BCC said:

“As small and medium sized firms across the UK continue to deal with ongoing economic pressures – accessing crucial finance is really tough. For many SMEs it’s a hurdle too large to even try and tackle. Giving firms easier and more competitive access to finance is crucial to getting the economic growth we all want to see.”

Scaling up businesses in the UK is already challenging and these problems are compounded by a sluggish economy. For female or minority ethnic led firms, the issues are ten-fold.

Many business owners are forced to dip into their own savings to grow their companies.

Lower Consumer Demand

The current economic headwinds we are experiencing have led to a reduction in consumer confidence and spending. When consumers are uncertain about their own financial future, they are likely to cut back on non-essential purchases.

For SMEs operating in sectors such as retail, hospitality, and services, a drop in consumer spending will directly impact revenues.

Lower sales volumes not only impact current profitability but also limit the funds available for future investments, marketing, and innovation efforts. This creates a cycle of reduced growth prospects, making it harder for SMEs to scale up or maintain their market position.

Increased Operational Costs

Inflation has had a knock on effect on operational costs for SMEs.

Inflationary pressures drive up the cost of raw materials, energy, and labour. SMEs often find it harder to absorb these costs compared to larger firms. They might not have the same leverage to negotiate better prices from suppliers or the ability to spread costs over a larger volume of sales.

As operational costs rise, profit margins shrink, leaving less capital available for growth-related activities such as R&D, marketing or growing the commercial headcount.

Supply Chain Disruptions

The current economic challenges have also caused significant disruptions in global and local supply chains. Issues such as trade restrictions, logistical bottlenecks, or supplier insolvencies have delayed production schedules and increased costs.

Smaller businesses often lack the diversified supplier base and logistical flexibility that larger companies possess, making them more vulnerable to supply chain disturbances.

It's not all bad though...

An economic downturn isn’t always bad for business. As not all sectors will be affected equally, it can offer SMEs an opportunity to expand and thrive. So, whether an individual sector is retracting or not, there are likely to be growth opportunities.

So the outlook for SMEs isn’t all gloomy.

In fact, some firms even relish tougher economic times as they’re challenged to compete harder. They can exploit gaps created by weakened or failing competitors; make their businesses leaner; drive more robust marketing strategies – and often emerge stronger.

Will Davies, CEO of property-maintenance firm Aspect, recently said "by just being a bit “better and hungrier”, you can find additional revenue streams and secure current ones, even in a downturn."

But before going after new markets or exploiting growth opportunities a downturn offers, it’s essential to have good cost controls. This protects your cash flow, margins and working capital through measures such as reducing debtor days, lengthening creditor days, and minimising and protecting against bad debt.

"In strong macroeconomic conditions, you can target revenue growth even if profitability lags,” says Will. “But during a recession, you must minimise that lag as growth needs to become cash-flow positive quickly."

A well-managed business with good planning and controls can exploit capacity from failing competitors. In fact, competitors will likely be restrained, so if margins and cash flow look reliable, there’s no limit on growth speed or size, even in challenging conditions.

What is apparent is funding access will be restricted as interest rates remain high.

As we approach a probable change in Government and hopefully a reduction in interest rates, SMEs need to use smart cash-flow forecasting to ensure they can meet current liabilities, as well as the costs of supporting growth ventures, such as hiring, marketing or new premises.

Regular forecasting enables SMEs to adapt to changing circumstances and pivot swiftly where necessary. Don't shy away from forecasting, even if it is time-consuming and difficult to maintain. SMEs that have forecasting embedded in their strategy far better than those taking each month as it comes.

Funding in uncertain times

When it comes to SMEs, there is no ‘one size fits all’. From the sole trader working alone on a market stall to the manufacturer with over 200 employees, the wants and needs of the entrepreneur vary considerably. Lenders must match each SME with the right finance.

At SME Capital, we know all businesses are not the same. So we provide bespoke, long-term growth capital funding solutions to UK businesses not one-size-fits all blanket loans. We exist because we truly believe we provide a better alternative with our custom-made funding solutions for UK businesses to help you grow and succeed.

It’s in our DNA.

We are experts in SME lending, so whatever the loan purpose, our goal is to become your long term funding partner, which is why each bespoke loan will be specially-designed for you.

We will work with you to make sure you are on track and the funding makes sense for your business, in your sector, at any given time.

We understand the importance of trusted relationships and have dedicated regional directors based across the UK who will take the time to understand your business, your unique needs specific to you and support you with your business loan application. We enhance our traditional underwriting with data analytics, including timely risk and trend analysis to put you in control of your future.

Whether you need financing for a refinance, succession planning, M&A, or growth and expansion, we give you the opportunity to thrive without asking you to give up control, equity, or personal assets.

SME Capital uses a cash flow-based approach to lending, offering a multiple of business profitability, specifically EBITDA, as opposed to a loan amount being directly tied to the value of specific assets. We can provide an economic solution to consolidate smaller lenders, or refinance expensive short-term loans, while providing additional working capital for the business.

With repayment terms ranging from 3 to 7 years and flexibility on repayment structures SME Capital is an effective, relationship-led refinance solution for qualifying businesses in any sector that have been trading more than 3 years with £250,000+ EBITDA.

About SME Capital

SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market and have dedicated Regional Directors based across the UK.

By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions.

How challenging economic headwinds can affect Growth and how SMEs can 'Buck the trend'