By Nikolai Hentsch, COO, AREX Markets
When business confidence is in steady decline, with interest rates and inflation increasing across the board, people are keeping much tighter reins on their expenditure. As things stand currently, SMEs around the UK could be forgiven for having some sleepless nights.
This sector accounts for well over 90% of the UK’s business sector according to the Federation of Small Businesses, as well as three-fifths of the nation’s workforce and half of its turnover. Simply put, the SME sector is critical to the economic success of the nation. And yet, as the country’s small businesses are so disparate, they face wildly differing market pressures – from dropping orders in manufacturing; to shipping costs and storage for retail; to high costs of labour and materials in construction. And yet, one major factor in all of these varied sectors and operations is common – ensuring that working capital on a daily and monthly basis is staying ahead of outgoings.
The much lauded “Backbone of Britain” is in need of a brace, and it is looking to external funding to support it. But, this isn’t an easy or straightforward task. Additional borrowing in the form of loans puts much more pressure and stress on a business’ future outgoings, and when so many are already carrying the costs of Covid loans, it is not an attractive proposition to seek out yet more debt. Major banks will be inflexible; many have already taken steps back from offering business – indeed, the FSB found at the end of October that one in five of its members were struggling to find loans at interest rates under 11%. Simultaneously, late payments to these businesses are getting even later. Xero found that in September alone, payment to the country’s SMEs slowed down by another two days, meaning many are also faced with not being paid on time, often by much larger entities, for work which has already been delivered.
Investors looking at this situation may be torn. The only way to shore up this significant chunk of the UK economy is to invest, and yet making sure they can access the funds they so desperately require will also mean taking on significant risks in such a ‘febrile’ climate. And yet, there are ways that savvy investments can be made, without placing those funds at risk. To do it, investors need to look to the alternative finance space.
For example, our service provides a fresh, fairer approach to invoice financing – unlocking the value in SME’s cashflow and meaning they are no longer bound to accepting late payments from customers. Acting as a marketplace for these invoices, our data-led approach means that investors with specific risk profiles can be matched with SMEs and invoices that meet those particular criteria – taking significant due diligence work out of supporting this sector for the investor. So, the SME gets more of their own money back into their accounts much faster, while investors can be confident they are helping to support such a vast and varied part of UK plc. By acting as an intermediary between SMEs and investors, services such as ours in alternative financial spaces offer these groups the assurance that their operations can continue without the need to constantly monitor their capital, which, in short, spells one less worry in the current climate.
Traditional methods of funding and business support are no longer sufficient to meet the needs of the country’s small businesses, and their needs are becoming increasingly urgent. Alternative finance can broach this gap and help companies through the current turbulence, as can investors. They need only find solutions that work for them rather than feeling forced to sit back and watch a vibrant and significant part of the British economy struggle, or to take on sizable potential risk, not to mention the paperwork of trying to understand a small business’ viability.
Many small businesses could benefit from the offering that alternative financial solutions offer, and yet uptake remains low, perhaps due to low awareness or the more urgent matter of shoring up profits day-to-day. That said, many of these small businesses are successful – the Barclays SME barometer found that revenues for Q2 2022 were significantly higher than over the same period in 2021. They just need a little assistance to bridge gaps which may be widening in their own cashflow. The country’s investors can be that bridge, and play a role in the continued success of these enterprises. They need only find the right solution to do so – and that solution will lay outside of the traditional business funding box, in the world of alternative finance.