SMEs are widely perceived to be the backbone of the UK economy, accounting for three-fifths of employment and around half of turnover in the UK private sector. Despite this, while lending to large corporates has steadily risen, growth in lending to SMEs has been stalling since even before the Covid-19 pandemic. Indeed, new findings from Codat cite that almost half of SME owners who are in the market for credit said they find it difficult to access external capital.
With the success of these companies crucial for the wider health of the economy, the Federation of Small Businesses warned last month that further barriers to finance for SMEs will stifle economic growth at a time when it is sorely needed, given many believe the official announcement of a recession is just weeks away.
Put simply, the existing credit landscape is not set up for SMEs to succeed, and there is an ever-widening gap between the financial support they and their larger counterparts are able to secure. Bridging this credit gap is key to addressing how businesses can not only remain resilient in unfavorable economic conditions, but strive for growth and thrive in the long term.
Looking outside of traditional channels
When looking to explore finance options to fund business investments, many SMEs will approach their bank by default. However, while the wider finance industry has evolved considerably, high-street banking remains somewhat antiquated. NatWest, for example, announced in October that it will be closing 43 of its branches across the UK, exemplifying how the traditional role that banks once held – providing customer service, a personal relationship with a bank manager, and reliability – is slowly disappearing.
When it comes to finance options being offered by banks, the routes to obtaining credit remain limited, making it all the more likely that a business will be unsuccessful in its application, or may make funding assessments based on surface-level information, rather than considering the wider business story. This may mean a business owner is either turned away immediately, preventing them from obtaining the financial support they need to grow, or commit to a product that isn’t suitable.
Clearly, an alternative option is needed. With the bespoke guidance that would have traditionally been provided by a bank generally no longer available, the road has been paved for others, such as finance brokers, to step in.
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Considering suitability of debt
Exploring all potential finance avenues will be crucial to solving the issue of the credit gap. All too often, SMEs take out the wrong financial product for their needs; sometimes due to a lack of understanding surrounding their options, and sometimes due to insufficient or poor guidance being offered.
Fewer than one in ten (9%) small firms applied for finance in Q1 2022, according to the quarterly Small Business Index (SBI), plummeting to the lowest level on record. This decline is being exacerbated by a difficult application process for default finance options that are too basic and frequently unsuitable – solely offering fixed-term loans or increased overdrafts, for example.
Nevertheless, appropriate alternative forms of funding can be secured through different channels – specialist finance brokers for SMEs can offer their expertise with regards to products that can directly facilitate productivity and growth.
For example, the relatively new Business Cash Advance has low barriers to entry in terms of eligibility criteria and is an ideal option for sectors and businesses that tend to experience uneven cash flow: they may see seasonal rises and falls in revenue or may struggle with customers paying invoices on time. These cash advances are repaid as a percentage of card sales and therefore are aligned with performance, making them far more flexible and easier to access than many more traditional forms of finance.
Accessing the right finance options can often seem like a challenge for SME owners, particularly in a time of economic downturn, and many may not be aware of assets they have that can be leveraged to secure finance. Asset finance is an often underused but effective solution that can present working capital solutions at a lower entry point.
From an external viewpoint, finance brokers can often identify opportunities – anything from medical equipment to agricultural machinery to telephone systems can be considered a valuable asset, and businesses can benefit from the debt being secured against the asset. For example, where businesses own existing assets outright, these can be refinanced to demonstrate a lower risk level to a lender, rather than raising ‘riskier’ new debt. Ultimately, this represents a cheaper form of debt that is more appealing to lenders when appetites for risk are low.
SMEs struggling to meet ever-increasing eligibility criteria required to get their foot in the door with banks means that accessible financing plans have become more important than ever before. Finance brokers with a better understanding of SMEs’ needs have a crucial role to play, going forward, and must step up to ensure that their diverse needs are met.
In challenging times of economic downturn, having access to tailored solutions and bespoke guidance can make a world of difference. Ultimately, successfully navigating our way through business challenges and into sustained productivity and growth will require brokers to take a hands-on, consultative approach to ensure that SMEs continue to grow and thrive on a long-term basis.
By James Cook
Source: Business Leader