We need a government scheme to guarantee future of UK SMEs

High inflation is the number one biggest challenge for SMEs. As this prompts fears that many could face their own cost of living crisis, Douglas Grant, Manx Financial Group’s CEO, below, says a permanent government scheme is needed for SMEs to survive.

A recession looms as SMEs continue to face unprecedented blows to their finances. This is a prospect that has now increased because of the latest prediction that the UK inflation rate, will jump beyond 18% early next year – the highest peak in over a century.

Consumer price index inflation has been forecast by economists to hit 18.6% in January 2023, while the retail price index inflation rate will hit 21%, because of the recent hike in energy prices. Coupled with painful rises in wage bills and raw material prices, supply chain issues and additional COVID-19 pandemic-induced problems, this is fast becoming a ‘fight for survival’ situation for many SMEs.

A recent study carried out with UK SMEs highlighted that the overwhelming majority (88%) see high inflation as the number one biggest challenge for SMEs. This is prompting fears that with the cost of borrowing set to increase, many SMEs will face their own cost of living crisis. For some time, SMEs have struggled with accessing finance. And while it is very good news that the Recovery Loan Scheme (RLS) has been extended until 2024 for UK business and goes some way to stemming the financial pain that SMEs are feeling, it is a short-term solution.

Permanent scheme needed by government

The RLS initially helped so many businesses survive the official lockdowns of 2020 and 2021, but as demand for working capital soars to new highs, more businesses desperately need a cash injection to counteract record inflation levels, rising interest rates, supply chain issues and increases in wages.

Manx Financial Group subsidiary, Conister Bank Limited, was approved last August as a British Business Bank accredited lender for the RLS. It enabled Conister to extend the support it had provided to SMEs throughout the COVID-19 pandemic. The scheme closed in June suggesting capital-starved SMEs, still recovering, and adapting to a post-pandemic landscape, will now need to find alternative forms of liquidity.

Although, that shouldn’t mean that businesses should struggle to access the finance that they need. Nor should it necessarily mean that growth should be lost by low sales, plummeting market expansions or no new product launches. It means an innovative plan should be developed to address this funding gap which goes beyond the revamped RLS.

And that requires a scheme that is backed by government and provides permanent “good loans” with more stringent lending criteria. Now is the time for a long-term scheme for businesses to leverage. It would be a vital way of funding companies that will drive economic growth.

Traditional banks and alternative lenders should collaborate

A government-backed permanent loan scheme, where collaboration would bring together both traditional banks and alternative lenders would be a much-needed way to guarantee the future of UK SMEs. As the government looks for ways to power the economy’s resurgence, the importance of a permanent scheme cannot be understated. We very much hope this is something that becomes a reality.

The research reinforces this. It warns that the lack of availability of finance will cost SMEs and the UK economy in terms of growth at a time when it is needed the most. The amount of growth that is being lost is becoming increasingly common.

No intervention, no growth

Further highlighting the impact of the financial pressures facing SMEs, an earlier YouGov study, commissioned by Manx Financial Group, noted that the lack of finance was causing these businesses to halt growth plans.

It stated that more than one in five (22%) small business that needed external finance and/or capital over the last couple of years were unable to access it. Moreover, 27% stopped or paused an area of their business because of a lack of finance. Too often, the biggest barriers in sourcing finance were cost, processing times and insufficient flexibility with repayment terms.

Some sectors of the economy are recovering more rapidly than others. For those sectors still struggling, they require an additional government intervention. A permanent scheme could act as the fundamental difference between make or break for many small companies and in turn, our economy. The research showed that a third (34%) of SMEs are concerned that their business will not grow in the next 12 months. However, with appropriate external finance, SMEs on average believe their business could grow by around 17%.