Policy Chair, Federation of Small Businesses
Small businesses disproportionately rely on external finance for their business operations, cash flow, and investment opportunities as they often don’t have excess capital available to expand and invest without outside funding.
Huge external shocks, like the Covid-19 pandemic, have a negative impact on the availability of finance for small firms, as they are seen as riskier to lend to in general.
There are worrying signs that loans to small businesses are becoming more expensive and harder to come by in the first place. Our research finds that only 12% of small firms applied for credit in Q2 2022 with only 45% reporting that the application was successful, down from 55% in the same quarter last year and from the pre-pandemic acceptance trend of 64% (for 2014–2019).
Lacking new growth opportunities
The constraints on lending to small businesses will inevitably have a knock-on effect on investment and, ultimately, on productivity and growth. In line with the low rate of successful finance applications, we found that small businesses’ investment intentions in Q2 2022 fell to a level not seen outside the first lockdown in Q1 2020, with only 23% of firms saying they plan to increase capital investment over the next quarter compared to the last.
Small businesses are currently overwhelmed with debt acquired over the past two years that will take a significant period to fully repay, with SMEs carrying £38 billion more debt in total than in January 2020.
The more lenders and financial products there are in the market, the more efficiently it will operate.
More finance options for SMEs to boost the economy
Small businesses that are struggling to repay their bounce-back loans should ensure they are using all available options, such as the Pay As You Grow scheme which offers various forms of relief, including a term extension, an interest-only repayment period, and a payment holiday.
The more lenders and financial products there are in the market, the more efficiently it will operate, resulting in better outcomes for both small businesses and the economy.
Payments failing to come in
Intensifying the cashflow problems many small businesses face is the longstanding late payment scandal, made even worse by the pandemic, with corporate customers treating small suppliers as a free line of credit. Half (50%) of small firms in Q2 had experienced late payments, and a fifth (22%) say the problem is getting worse.
The Government has rightly identified greater board accountability as the key to spurring change in this area, and we want to see urgent action before it’s too late for thousands of small firms.