As 2025 begins, SMEs are setting their sights on the opportunities and challenges the year ahead may bring.
The past year fell short of delivering the stability many had hoped for. While inflation showed signs of easing, the July general election dominated the agenda, creating uncertainty for SMEs as they awaited the outcome. This was followed by further anticipation leading up to the October Budget.
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Despite the prolonged lack of clarity that characterised much of 2024, business sentiment has shown resilience. Recent surveys reveal a nuanced outlook: while SMEs remain cautious about the broader economy, they express greater optimism about the future of their own operations.
We have certainly seen that at Paragon, with both our new lending activity and our loan book up for the year as SMEs invested in the assets they need to grow their business.
We hope to see that momentum continue in 2025, a year where we should see some more meat on the bones of the new Government’s plans to inject growth into the economy. There are a few themes that I believe will frame the year.
Sustainability has been a significant topic in the industry for years and will continue to be so. As we approach 2030, it is expected to become more prevalent as regulations, such as those around electric vehicle production, draw closer.
Car manufacturers are already responding to this deadline by increasing the production of electric vehicles. It remains to be seen whether the 2030 deadline will stay in place or be adjusted if electric vehicle sales decrease.
The Net Zero 2050 target is also on the horizon. Although it may seem far away, the continued use of diesel-powered machinery and equipment especially in the construction industry, to name one, indicates that many businesses will need to invest in this area.
Within the asset finance market, we are starting to see more green equipment with good capabilities to rival the older diesel-powered models – but more investment is needed within this space to enable businesses to adopt green equipment, which can come with a price premium.
Furthermore, green energy is something else we’re likely to see more of. With the Government in power for almost six months now, we’re starting to see that going green is a big priority in the energy sector.
The focus on green energy will be welcomed by many SME businesses, as increasing the use of green energy produced in the UK could lead to greater self-sufficiency and reduce dependence on the volatile energy market.
Aside from sustainability, we also expect we’ll start to see more of an industrial plan forming.
The UK has not had an industrial policy for some time. A long-term plan could potentially support SME businesses and benefit the economy.
It will be interesting to see whether the Government unveils anything along these lines this year and I’m sure it would be welcomed by many businesses.
Finally, we may see more businesses utilising finance in 2025, especially given the rise in employer National Insurance Contributions from April.
Businesses that haven’t used finance before may now consider asset finance for new equipment or invoice finance to manage cash flow, especially with the NI increase putting more pressure on costs.
The importance here is that businesses looking to utilise funding work with reputable lenders and anticipate whether they might need to use a form of finance in advance so that they’re not left feeling like they’re short of money at the end of the month and then forced to work with lenders with sky-high interest rates and poor terms.
Finance can benefit businesses, especially if working with the right lender. However, it’s important that as we head into the new year, businesses look at their books and seriously consider what kind of support they might need, if any.
SMEs may face challenges in 2025, but with the Government implementing its agenda and clear goals, we anticipate market stability and a more productive environment for businesses to succeed.
Phil Hughes is Deputy Managing Director of Paragon SME Lending
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