Insights

The reality for businesses raising funds in the current UK economic climate

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Greg Taylor · Posted on: September 30th 2022 · read

Greg Taylor, Partner & Head of Banking & Finance delivers his views on why the current challenging economic climate is the perfect time for businesses to raise funds.

"In my nearly 30 years in the Financial Services sector, I thought I’d seen it all, but the challenges SMEs have faced over the past 3 years have been unprecedented."

Since the start of the global pandemic, firms have had to contend with inflation hitting a 30-year high, a once-in-a-generation energy crisis, the outbreak of war in Ukraine, interest rates undergoing the largest single increase since 1995 and the pound falling to a record low against the dollar. The list of challenges for businesses seems to grow almost daily.

While many of these challenges are indeed unprecedented, so too has been the response from businesses; to overcome, adapt, and thrive rather than just survive. Given this backdrop, can there ever be a “right time” to raise debt funding? Or should SMEs reflect more on their own performance & marketplace then separate this from the broader macro-economic outlook?

Commercial finance – who is the best provider to go to?

With UK banks continuing to reduce their exposure when it comes to SME lending it certainly could be seen as a rather a bleak picture.

But business funding is no longer the sole preserve of the traditional high street banks.

While high street lenders may have once been the only port of call for businesses looking to raise capital, many businesses are now benefitting from the increased flexibility and bespoke approach that Challenger Bank & specialist non-bank lenders can offer.

However, research conducted by BOOST&Co for the 2022 Geared for Growth Report suggests that up to a fifth of businesses with a turnover of less than £10m are held back by a lack of awareness around the alternative growth funding options.

What makes now the “right time” to access funding?

In an economic downturn most banks’ appetite for lending to SMEs will decrease, as this segment of the market is generally considered a higher credit risk. But large institutional lenders are less agile than their smaller counterparts and will take some time to react to the environment, meaning that an SME loan application made now is more likely to be approved than in six months’ time, assuming predictions of an economic downturn become the reality.

Specialist SME lenders are more likely to lend to creditworthy businesses throughout an economic lifecycle, so although businesses that react quickly to the current climate may capitalise on their fast decision-making, firms should be assured that alternative lenders will continue to offer support to creditworthy businesses with viable business plans.

If you are able to secure a fixed rate deal sooner rather than later, this will provide visibility over borrowing costs for the entirety of a loan term, in an environment where rates are moving quickly and expected to increase further. However, only a limited number of business lenders will offer these long-term fixed rates – and it is likely that the starting rate will be much higher than for a variable interest loan.

What about the risks of not raising funds right now?

As ever cash is king, so when the going gets tough it is often the larger and more established businesses with a capital buffer that will ride out any economic turbulence. For SMEs, this is why having a strong balance sheet and access to additional working capital is undoubtedly a good idea when entering an economic downturn.

The risk of not raising funds, if working capital is not readily available, is that any change to cash coming into a business – via declining sales, or a squeeze on margins – has a significant impact on a firm’s ability to reinvest and grow. Previous experience shows us that it is often the businesses that invest in market diversification, product development and accelerated digital transformation that not only survive but thrive in an economic downturn.

Bank lenders will likely begin decreasing their lending to smaller firms and economically exposed sectors within the next few months, if they haven’t already. The better option then becomes a specialist SME or sector-focussed lender that will have the expertise and experience to understand your specific business model, beyond broader market trends, giving businesses the chance to acquire that capital buffer to not only survive but also thrive.

With such a disparate financial services market it is more important than ever to have a “trusted advisor” who can offer guidance to SME’s on what alternative growth funding options are available to them.