It is easy to become complacent about SMEs and their access to finance. After all, new asset finance business grew by 3% overall in 2024 to reach a new record level of £39.7 billion, of which lending to SMEs accounted for £23.5 billion, according to the Finance & Leasing Association (FLA).
However, SMEs are seemingly reluctant to invest, and are generally averse to using external finance, preferring instead to use credit cards, overdrafts and personal loans. The business support network is perceived to be complex and fragmented, and bank finance success rates are low. That, in itself, can create a self-fulfilling cycle, by undermining demand.
Go deeper with GlobalData
While there are of course some constraints on the ability of SMEs to borrow, poor quality data on their own businesses hardly helps, and invariably an uncertain economic climate, mean that the vast majority of SME owners do not even bother to seek external advice.
Challenging environment
The economic climate is concerning to Martin McTague, national chair of the Federation of Small Businesses (FSB), whose latest Small Business Index report (for Q4 2024) reveals a decline in confidence to -64.5 points. This is the lowest ever reading, excluding the Covid pandemic period, and that alone will be troubling Chancellor Rachel Reeves as she presents her first Spring Statement on March 26, ahead of other policy announcements this year.
The operating environment for SMEs certainly appears to have worsened since Labour took office following the general election in July. That is the opinion of 70% of finance brokers surveyed in the latest SME Expert Index by the business finance provider iwoca.
Rising operational costs are creating anxiety for business owners, and while there is optimism that things can be turned around, inflation and even recession fears predominate, prompting some 38% of finance brokers to urge the government to cut taxes to foster business expansion.
The FSB’s Small Business Index paints a similar picture. “Across the board, small firms’ responses around everything from current and projected revenues to their recruitment and investment plans took a hit [in Q4],” says McTague. This only underlines the difficult position many small business owners find themselves in.
The domestic economy was cited as the number one problem facing small businesses, and it is not hard to fathom. There are simply too few positive economic indicators to provide encouragement, with the annual rate of inflation creeping back up to 3.9% in January, and real GDP declining by 0.1% (month-on-month) in the same month. That, in turn, follows a miserly 0.1% (quarter-on-quarter) rise in Q4 2024, plus no growth at all in Q3.
SMEs are moreover squaring up to the government’s decision to increase employers’ National Insurance (NI). It will rise from 13.8% to 15% in April, with a reduced threshold for payment from £9,100 to £5,000 per year. Although a rise in the Employment Allowance will help to mitigate the impact, it is hitting SMEs’ wage bills, forcing workforce redundancies and even putting business viability at risk.
Helen Lumb, managing director and chief financial officer at Shire Leasing remarks, in relation to the NI increase, that “access to asset financing as an alternative form of borrowing may be key to enabling planned investment for growth, against a backdrop of this unexpected and unbudgeted additional cost.”
Sam Phillips, founding managing director of strategic advisory firm K3 Advantage refers to all of these economic issues as a “perfect storm,” adding that of the 250 UK SME founders and owners his firm has surveyed, some 73% admit that running a business now is harder than it has ever been. “It is unsurprising that 41% of SMEs say they are more likely to consider a sale, investment or refinancing in the 12 months ahead, compared to the previous 12 months.”
This is neither good for the economy nor for the health of the UK’s more than five million small business owners. Indeed, the percentage of small business owners who say workplace worries keep them awake at night has hit a 10-year peak, according to research from Novuna Business Finance. Nationally, 82% of business owners say their sleep is broken, or they lie awake at night worrying about pressing business issues, increasing from 75% a year ago. The manufacturing, agriculture, legal services and transport/distribution sectors have seen this problem magnify the most.
Among the contributing factors are uncertainty surrounding the market outlook (cited by 47%), the impact of rising National Insurance and the prospect of future tax and interest rate rises (40%), strategies to retain business (28%), managing cash flow (28%) and the burden of red tape (26%). Moreover, 15% of small business owners say they are still feeling the adverse impacts from the long tail of Brexit on their business.
Late payments are a key concern among all this. According to the FSB, some 69% of small firms reported that they experienced late payments in Q4 2024. Separate research by money.co.uk business credit cards indicates that nine in ten UK businesses in total experience payment delays, significantly impacting their cash flow.
It is an issue that is especially concerning for smaller businesses with limited financial reserves, as late payments can obviously severely disrupt operations. It could also make firms insolvent, and therefore have a deleterious effect on supply chains. Consequently, the decision to make audit committees of large companies directly responsible for reporting on supply chain payment practices is welcomed by the FSB, which was a key player in the inception of the new Fair Payment Code that is aiming to address this issue.
Key role for finance
Yet all this doom and gloom also represents an opportunity for the financing sector, not least because SMEs remain surprisingly optimistic that economic conditions will improve. Some three-quarters of those surveyed by K3 Advantage, while acknowledging the present tough operating environment, indicate that they still feel confident about overcoming the challenges this presents.
“As always, SME’s need financing options that are relevant to the challenges they face,” says Lumb of Shire Leasing. She points out a recent article in The Times describing a growing aversion to traditional borrowing among SMEs, influenced by witnessing peers struggle with financial distress.
“This reluctance to borrow is a concern as it could hamper future investment and productivity, and so it is imperative that the SME sector has access to appropriate funding solutions,” she says, pointing to alternative and bespoke lending solutions, designed for specific needs. This may be unsecured loans, refinancing, merchant cash advances, invoice discounting or other, innovative asset finance solutions.
Shire Leasing has responded to the need for innovation to meet market needs by developing an “HP Balloon” product targeting environmental sustainability. As Lumb and her colleague Malcolm Workman, chief operating officer, explain, this solution allows up to 30% of the asset’s cost to be deferred until the end of the term, enabling SME customers to invest in energy-saving assets more affordably. It aligns the cost with the period over which the benefits are realised, enabling SMEs to manage cash flow and their sustainability requirements.
Obtaining the right type of financing is crucial, as running a business is a time-consuming exercise, says Neil Rudge, chief banking officer commercial at Shawbrook, adding that, “SMEs are seeking clear, targeted financial solutions to ease their challenges. They are looking for flexibility and understanding of their unique needs.”
The non-traditional lenders (challenger banks) are aware of that unique perspective, having become an increasingly important aspect of the market, accounting for some 60% of annual gross bank lending to SMEs, according to the British Business Bank.
Rudge says that offering clear, concise information on the right financing options – whether for reinvestment, R&D or cash flow – can help businesses access the support they need more easily. He also argues against applying rigid, one-size-fits-all criteria as the key to sustainable growth for any business lies in exploring every option.
“What many businesses think they need is often not the optimal solution, which is where specialist lending comes in,” he says. This means engaging with lenders that provide a more bespoke service so that businesses discover financing options they might never have considered. These would be more aligned with a firm’s growth ambitions, current financial position and long-term goals.
At a lender like Shawbrook, “the suite of products is constantly evolving, designed to flex with market conditions and meet the specific needs of SME’s,” says Rudge, who adds that the message for SMEs is not to settle for the first option, but take time to explore the possibilities with a finance partner that understands the intricacies of the business.
Brandon Hall, head of sales-broker asset finance at Allica Bank concurs. Launched during the pandemic, Allica Bank is a comparatively new outfit wholly committed to small businesses.
“Cash and liquidity are key in any business, but especially when navigating headwinds,” says Hall. In this light “refinance will be pivotal for businesses that are able to release cash from their assets in order to trade through difficult periods when the cash flow cycle typically elongates.”
Hall mentions that while it is important for SMEs to seek advice from their finance providers, this is not always easy to do. He mentions a 2024 survey by the Great British Entrepreneur Awards that stated, of 450 SMEs surveyed, 206 banked with the big six on the high street and 59% believed their businesses did not receive adequate attention. “This is why it is important for SMEs to look beyond the big banks and shop around for better business banking options,” he says.
SMEs and lenders alike also need to obtain better information on how businesses are performing. As Phillips of K3 Advantage notes, By overlooking data, businesses are eroding their value, which may hinder or limit their ability to seek new financing.
“They are missing the ability to recognise growth potential, forecast risks and identify opportunities,” he says. These are fundamental components of a successful business plan, Phillips says, and whether leaders are considering a sale in the near-term or not, improving data visibility and quality is integral to optimising business performance.
Surprisingly, some 52% of SME’s that K3 surveyed admitted that they do not have full visibility of three years’ worth of monthly management accounts, even though these data insights are crucial at any time, and not least during the very uncertain economic environment that prevails.
Compounding this, says Phillips, “the research found that the ‘gut feeling’ business leaders have about the performance of their business is often at odds with more robust operational data.” This indicates that business leaders may not have a truly accurate sense of how their enterprise is faring.
Role for government
The government does at least provide some help to SMEs, including through the British Business Bank (BBB), with a focus on high-growth sectors such as advanced manufacturing, green energy and digital technology. Yet clearly it could do more to improve the operating environment for SMEs and ensure that SMEs financing needs are appropriately addressed.
Hall at Allica Bank says the government must continue to offer support via the British Business Bank, with schemes designed to assist SMEs with access to affordable tailored funding. This is crucial, he says, and it will help funders remain committed to the sector.
He would also like to see a tiering system introduced for National Insurance, with some assistance offered to “people-heavy sectors” such as the care and leisure industry, among others. Further, on the economy, he adds that US protectionist policies will have a significant impact on trade, and the government needs to obtain the best deal available to mitigate the impact of tariffs on business.
Meanwhile, the FSB’s McCague would like to see the government play a bigger role in ensuring that small businesses, particularly in the start-up phase, have access to competitive rates of credit. “We are calling for the extension of government-backed loans, specifically targeted at early-stage small businesses with strong potential,” he says.
“Larger banks are increasingly making the credit environment trickier for small businesses to access and we would like to see initiatives to increase access to credit.” He notes the fact businesses grow most rapidly in their early stages, and this means that ensuring proper credit channels could help to unlock economic growth.
The FSB is also continuing to lobby government to take action to ensure that personal guarantees are applied in a proportionate and transparent fashion by lenders, rather than as a blanket policy, even for disproportionately small amounts. According to McCague, “the over-use of personal guarantees chills small firms’ appetite to take risks to grow, which is very bad news for the economy overall.” This requires legislating to include personal guarantees within the Consumer Duty that was introduced by the Financial Conduct Authority in 2023.
Fortunately, the government does seem to be listening. In March, it launched an open call for evidence, soliciting views on small business access to finance ahead of its industrial strategy, to be published in June, and small business strategy later this year. This could prove to be a pivotal year for SME finance. One can only hope the government responds accordingly, and of course the economy improves.
