How SMEs can secure funding they need to fuel growth

By Tom Perkins, above, Director & Co-Founder, Charles & Dean  

As the Bank of England drives up interest rates to the highest level since the 2008 financial crisis, pressure is mounting on small businesses seeking to borrow money. The IoD Directors’ Economic Confidence Index, which measures business leader optimism in prospects for the UK economy, fell to -31 in June 2023, down from -6 in May, wiping out the improvements recorded since the beginning of the year.

These figures were released alongside news that the Treasury Committee has launched an inquiry into the challenges faced by small businesses when seeking finance and whether government legislation is doing enough to support SMEs. With such significant issues continuing to impact small businesses across the UK, it comes as no surprise that official bodies are now re-evaluating how this funding can be accessed and whether government incentivisation is doing enough to support business growth.

Many businesses want to preserve their liquidity as it serves as a day-to-day operating source. Current spiralling costs means many businesses are without a financial safety net. While they may have enough capital to survive, where they may want to invest to boost efficiency or enable innovation, there remains a disconnect over the best way to secure this funding. This issue is exacerbated further by a general lack of information on how to make the most of ongoing government incentivisation: hence why the current funding gap between larger businesses and SMEs sits at around £22 billion.

According to new research from HedgeFlows, 70% of UK SMEs say their bank actively discriminates against them in favour of larger companies, pointing to an ongoing struggle between banks and small businesses. Amid bleak economic forecasts, SMEs have witnessed a marked decline in lending from an antiquated banking sector looking to avoid ‘high-risk’ lending. Where high-street banks are seen as the default option for many business owners seeking finance, these surface-level funding assessments often mean they are simply rejected outright or offered unsuitable products that do not align with larger business goals.

Brewing discontent over the current lending landscape and a marked volatility in the cost of borrowing has eroded SMEs’ trust and confidence in the banking system to the extent that they are seeking alternative funding sources. Charles & Dean’s own research, finding that funding enquiries were up by 277% in Q1 2023 vs Q1 2022, clearly demonstrates UK businesses are showing no sign of wanting to slow down and instead are looking to boost productivity. However, it’s crucial that there are routes open to them in order to make these plans a reality.

Understanding the best routes of securing finance outside of the traditional channels of overdrafts and fixed-term loans can begin to bridge the funding gap and ensure SMEs are reaching their full potential. With bank closures and the increasing digitalisation of banking services, specialised finance brokers provide access to bespoke guidance and a pathway to a suitable lender that is more likely to approve their application.

Government intervention, too, has a clear role to play in boosting business confidence and stimulating investment.  With the new capital allowance package set to bring £27 billion in business tax cuts, while also allowing full expensing on qualifying expenditure on new plant and machinery equipment, there is potential for growth. However, there has been a significant disconnect between governing bodies, lenders and the SME market on how to best communicate the benefits of investing in such schemes. We saw the proof of this in the underwhelming uptake of the super-deduction regime introduced during the pandemic. A well-thought-out incentivisation scheme is of course crucial, but perhaps even more important is ensuring that businesses are educated on what they can gain from such schemes and how they can take advantage.

Ultimately, in the context of reacting to difficult periods, flexibility and resilience will be the common trend between businesses who find opportunities to grow. While the next few months may bring fresh periods of economic uncertainty, businesses that understand how to react to these changes and find ways of gaining access to the finance they need will be the ones that stand out from the rest and boost their productivity this summer.