Optimistic SMEs face costs challenge

thinking sme worker

Britain’s small and medium-sized enterprises are cautiously optimistic about their prospects for the year ahead, new research shows, but nervous about the extent to which their costs are set to rise.

A latest Barometer, the quarterly snapshot of SME attitudes, opportunities and threats, reveals that almost half of SME leaders now believe the UK economy is on an upwards trend, albeit with differing views about the pace of the recovery. More than a fifth say they expect their business to perform more strongly over the next 12 months, against only 11.8 per cent who expect contraction or closure.

Nevertheless, many also see substantial cost pressures threatening their ability to grow sustainably. Almost a quarter of businesses say their biggest worry about the coming year is coping with the cost of the national living wage, which rose 4 per cent to £7.50 an hour for the over-25s in April. Almost as many SMEs say their biggest concern is rising business rates, with the levy due on 1.8 million commercial properties also having risen in April.

More generally, rising inflation is now beginning to have a major impact on firms with the cost of raw materials and other elements in the supply chain now rising much more quickly than the prices businesses feel able to pass on to their customers. Producer price inflation in March, for example, was 3.6 per cent, against general inflation of only 2.3 per cent.

Another problem is the issue of clients paying their bills late. Across the UK as a whole, research suggests SMEs are now owed more than £44.5bn in late payments; Labour Party leader Jeremy Corbyn has made headlines in recent weeks with accusations that large companies are deliberately withholding payments from SMEs in order to boost their own cash flows.

While such claims are disputed, research certainly suggests that late payments are an enduring issue for many. Almost a third of respondents said late payments were a problem for their firms. Of these, almost two-thirds said they suffered cash flow problems as a result, close to one in five are being forced to rein in necessary spending, and nearly one in 10 are worried that the problem is seriously threatening their ability to trade.

The range of cost challenges now facing companies suggests some businesses may struggle to capitalise on their optimism about their future trading prospects. While a recovering economy and improving business trading augur well for SMEs, margin pressure threatens to constrain the ability of many firms to grow.

To overcome this challenge, SMEs will need to ensure their businesses are built on solid financial foundations, with cash flows that are robust enough to withstand the day-to-day difficulties caused by rising costs, and the capital freedom to invest for future growth.

That will require considering all their potential funding options, including invoice finance and asset finance. Currently, too few firms understand what is possible beyond conventional solutions. The Close Brothers research reveals that more than half are not aware of any alternatives to funding outside of traditional banking, while only just over a third say they understand how invoice finance works.

Improving SME awareness and knowledge of alternative finance would therefore be a crucial step forward in helping many businesses to fulfil the potential for growth they recognise. Solutions such as invoice and asset finance can provide businesses with flexible and scalable funding designed specifically for their individual needs – exactly what SMEs will need as they seek to balance cost pressures against growth opportunities.