"What may hold them back is a business funding sector dominated by a small number of very large lenders who may well feel their risk exposure is already too high after a year and a half of supporting firms"
We’re hearing a lot lately about a ‘return to normality’ following the last 18 months of upheaval and many are judging the outlook for the economy, and business in general, in terms of whether we are nearing a return to the pre-pandemic economic environment.
However, what’s clear is that ‘normal’ going forward is likely to look a lot different to the way it did at the tail-end of 2019. Businesses are unlikely to come out of this period with the same outlook that they had back then and there are a number of different factors to contend with which were simply not as significant two years ago.
For instance, many firms are having to deal with a shortage of resources at the moment, whether that be human or otherwise, while the cost of many of the items companies rely on has also risen. Think of industries such as house building, where the cost of raw materials like concrete and bricks has been on the rise for some time, and you can see why the price of new-build homes is on the rise. That undoubtedly impact a business’s overheads and what they can afford to do.
Recent figures from UK Finance show that gross lending to UK SMEs fell in the second quarter of 2021 to £5.2bn from £7.6bn in the previous quarter, suggesting a return to lending activity more akin to the pre-pandemic world. However, they fail to tell the whole story of lending over the last 18 months and how that may impact businesses in the future.
The first half of 2021 has seen gross lending of £12.8 bn compared to £40bn in the first half of 2020 and £34.5bn in the second half of last year. Undoubtedly 2020 was an ‘outlier’ year in terms of the borrowing requirements of businesses in order to stave off the worst aspects of the pandemic. We know, however, that the majority of that lending came from government-supported schemes, which firms will soon need to start paying back.
We also know that government support, such as the furlough scheme, is coming to an end soon, so firms will have to start looking at what funding they require in the months and years ahead to help them recover from the pandemic and ensure they are profitable and growing concerns.
There is no doubt that SMEs will continue to need financial backing in order to grow, but what may hold them back is a business funding sector dominated by a small number of very large lenders who may well feel their risk exposure is already too high after a year and a half of supporting firms, albeit with the government’s backing. And even with government backing, if some of their business customers struggle to re-pay their bounce back loans that may hit their lending appetite even further.
That could leave many UK SMEs in particular in a tricky spot, because, while many are feeling confident about their future trade prospects, they will need strong funding lines in order to grow and make the most of the new business opportunities they see. Our recent survey of SMEs revealed that 78% are either ‘confident’ or ‘very confident’ that they will receive a boost in trade over the next three months, particularly as many Covid restrictions have been eased.
As a result, they want to invest further in order to benefit fully from that boost, so 24% said they plan to buy new equipment, 21% want to buy new stock, 19% want to add further products and services, and 17% want to invest in e-commerce technology, plus 17% want to recruit more staff – easier said than done in the current climate.
But these growth plans will be difficult to deliver if they can’t access the funding they need.
A recent report by the All-Party Parliamentary Group (APPG) on Fair Business Banking into SME funding highlighted the need to boost the challenger bank sector in order to provide more options for small businesses. It said the current system wasn’t fit for purpose as it was dominated by four ‘share-holder driven’ banks and it required a more level playing-field. The APPG report said newer businesses and firms outside of London and the South East in particular were being ignored by mainstream banks.
That’s certainly our viewpoint especially when the bigger lenders are moving away from a relationship-based approach to their business customers. Tick-box lending exercises for SME applicants don’t work for the vast majority – you need to get inside the details of the firm and fully understand what they are trying to do and what their situation is. You can’t simply decide that you won’t lend to a business because of the sector they operate in or where they are based in the UK.
The good news is that business customer choice is growing, but there is still much to be done. As we slowly climb out of this difficult period, many firms see a much brighter outlook – they just need greater levels of support and access to funding than they have been privy to before. It’s up to us as an industry to make sure we can deliver this.