The past year has seen the continuation of steady UK growth alongside a degree of political stability after the re-election of the Conservative Party with a majority in May. The result is that business confidence in general is positive. But what of SMEs in particular? And what could 2016 bring?
First, we’ve seen a huge amount going on in the SME finance market, with a lot of noise around alternative lenders and the government encouraging banks to lend more to SMEs. This is evidenced by the temporary reduction in capital weighting for lending into the SME segment, but also a realisation that there is no single solution to channelling sufficient funding into small companies.
During the last 12 months, there has been a revival of confidence among SMEs who are now looking to borrow, and timing is good with default rates at historically low levels. Business investment is also increasing on the back of rising consumer confidence and spending, and we’ve seen 20 per cent more small businesses applying for credit. It seems that there is now a much greater understanding of the different forms of credit available to SMEs. More traditional forms of borrowing such as the bank overdraft are still falling away and companies are increasingly realising that there are alternative forms of funding available.
The Conservative victory in May has also brought political stability and policy certainty to the markets, and this is allowing SMEs to make investment and expansion decisions with confidence about the future. The election result may have made a referendum on the EU inevitable, and for some businesses, particularly exporters, this is causing some concern. For the most part, however, given that no one knows what form a Brexit would take, SMEs do not have this at the top of their list of concerns.
There are some negatives to this picture, however. SMEs should still be wary of the potential EU exit and the economic uncertainty it could create, which could then have an impact on business and consumer confidence. Another one of my concerns is that some of the alternative finance providers who are now servicing parts of the market that banks have withdrawn from – particularly investment funds lending to SMEs – might also leave the market quite quickly should the economy sour. There is also the problem that, with alternative providers taking the juicy bits of the business finance market, they are making it very difficult for banks to continue to operate business current accounts and remain profitable without charging higher fees.
The likelihood of a rise in interest rates next year is causing trepidation too. The fortunes of SME Britain are closely tied to the fortunes of the consumer, and it is unclear how much spending power a rate rise will take away. Even if mortgage rates go up by just a few percentage points, it could slash the amount of money flowing into the SME sector, meaning that even small and gradual interest rate rises could cause problems. SMEs should also be aware of the National Living Wage increasing to £7.20 an hour for workers aged 25 and older (up from £6.70 per hour) in April 2016, increasing operating expenses.
Finally, there is an increasing amount of fraud targeting SMEs, exploiting the good faith and time pressures faced by small firms. One particular structure involves a purported supplier phoning up the company and requesting that the payment for an order is paid into a different bank account. Fraudsters are employing similar tactics with larger businesses and lenders.
Broadly, however, although some sectors have had a better year than others (the fall in commodity prices has had a variable impact on different parts of the manufacturing industry, for example), 2015 has been a positive year for Britain’s SMEs.