Is optimism returning to the market for SMEs? – by Simon Adcock

Simon Adcock, Regional Director for London and South East, reflects on renewed optimism in the SME finance market seeking commercial finance to accelerate growth.

You can contact Simon here.

Over the past year, the UK economy and lending market has been surrounded by political and economic uncertainty. Following the Bank of England previously implementing seven consecutive interest rate hikes in the past year alone, the commercial finance market has experienced a significant slowdown due to increased nervousness and uncertainty. Similarly, traditional high street bank lending remained subdued and the demand for new finance continues to trend below pre-pandemic levels.

Discussions with our network of finance brokers and intermediaries across London and the South East indicate a rise in asset finance and leasing usage among SMEs, while working capital finance has seen month on month decline. This highlights the challenge businesses face in having to pledge hard balance sheet assets to secure the financing they need. A recent study by finance brokers revealed a 45% increase in rejected SME finance applications in the past month compared to the previous month.

In the same study, 71% of brokers noted that their SME clients were increasingly concerned about the possibility of a recession, whilst 84% observed that banks are growing more reluctant to lend to SMEs. Moreover, 81% predicted a surge in demand for financing over the next six months due to rising business running costs, higher interest rates and difficulties in hiring and retaining staff.

These increased rates pose a real threat to small businesses, making it more difficult to pay off debts quickly and access loans to cover unexpected expenses.

While loan applications for finance continue across the UK, lending criteria have tightened, and deals take longer to complete compared to previous years. We, and our intermediaries, believe that this could be attributed in part to commercial property values falling by approximately 30% and residential properties also dropping by 5%. While this presents opportunities for some, it poses challenges for current landlords, along with higher debt burdens as many fixed-term mortgages come to an end.

However, it’s not all bleak for SMEs and there are signs of optimism ahead. As we transition into an era of customer-focused lending, the alternative finance market offers greater liquidity, increased flexibility and evolving advice. We (as an example) examine various aspects of SME businesses before devising tailored plans to assess their needs and vulnerabilities, striving for mutually beneficial outcomes.

This joined-up approach was best exemplified in a recent funding deal we closed with Norwich-based shoe manufacturer Start-Rite Shoes. The company struggled to secure finance from traditional high street banks that were not able to provide the commercial finance at the speed it required. An agile solution was needed to launch a new product range during a critical ‘back to school’ trading period, enhance cashflow, improve its supply chain and drive revenue across its core trade and direct-to-consumer markets.

We provided the speed and flexibility of lending, processing the deal at the pace required to meet forward orders for the client’s new product range and capitalise on the crucial trading period.

Furthermore, Investors, Private Equity Houses and alternative lenders are displaying confidence and injecting significant capital into the market, something we have ourselves recently experienced after receiving a £50m increase to our funding from Foresight Group. This will enable us to provide further capital to support SMEs as we continue our growth plans to achieve a loan book of £350m in the next three years.

Despite the pessimism, political and economic uncertainty, and stagnant bank lending of the past year, there seems to be a renewed sense of confidence following the most recent announcement to hold interest rates. I am sure this confidence will lead to many SMEs exploring new opportunities as their circumstances evolve, resulting in increased demands for traditional forms of working capital finance and asset based lending.

In summary, while we continue to navigate uncertain times, we may have reached the peak of current interest rate hikes. A viewpoint echoed in a recent talk I attended by the Bank of England, which suggested that rates are likely to remain at their current level until the fourth quarter of next year, with a gradual reduction thereafter. The outlook for growth, both in the economy and for SMEs, appears optimistic yet steady.

This article was featured on Insider Media. You can read it here.