In spite of the challenges that SMEs have faced during the past three years, attitudes towards growth remained surprisingly positive at the beginning of 2022, with 78.6% of businesses confirming their confidence at the prospect of achieving growth in the following 12 months. 

Since then, 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 and now interest rates undergoing the largest single increase since 1995. The list of new challenges for businesses seems somewhat relentless.

The word “unprecedented” has been used a lot in recent years – and while many of these challenges are indeed unprecedented in their scale and number, so too has been the response from businesses; to overcome, adapt, and thrive rather than just survive. 

With this in mind, can there ever be a “right time” to raise debt funding? Or should ambitious SMEs reflect more on their own performance, market drivers and growth plans, separating these from the broader macro-economic outlook?

We attempt to answer these questions with four more of our own…

1. What does the current funding environment really look like?

With UK banks continuing to reduce their exposure when it comes to SME lending and the revelation that UK SMEs collectively missed out on £3.5bn of funding from traditional lenders in 2021, it certainly paints a bleak picture.

But business funding no longer starts and ends with traditional banks.

While the high street lenders may have once been the first port of call for businesses looking to raise capital, the approach of these lenders to SME funding since the pandemic has encouraged business leaders to look elsewhere, with many benefitting from the increased flexibility and bespoke approach that non-bank lenders can offer. 

However, research conducted by BOOST&Co for the 2022 Geared for Growth Report also suggests that up to a fifth of sub-£10m turnover businesses are held back by a lack of awareness around the alternative growth funding options. It is therefore clear that all lenders – banks or otherwise – must do better at educating firms on what is available to them.

On a colloquial level at least, we can confirm that non-bank lenders are very much “open for business”.

2. 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 are proved valid. 

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 rest-assured that alternative lenders will continue to offer their support to ambitious businesses with viable growth 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 generally expected to increase. 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.

3. Are there any particular business models or industries that are better suited to borrowing in the current environment?

Just as there were industries that were particularly hard hit during the pandemic and there were those that thrived, the challenges of the new economic environment may treat different business models and sectors with similar polarity.

If you lead a business that operates in a counter-cyclical or highly defensive industry, now might be a particularly good time to apply for debt funding, because lenders will be actively looking to increase exposure in these areas. Examples of such firms are B2B businesses with contracted revenue streams, including Software as a Service (SaaS) companies, and public sector service providers. 

Businesses heavily exposed to consumer spending, or industries that are significantly impacted by wage or energy inflation, will likely find accessing debt funding more challenging than it was six to 12 months ago, as lenders will find it less easy to become comfortable with their risk profile.

4. 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 capital buffer that are able to ride out 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 this working capital is not already easily available, is that any change to cash coming into the business – whether that be through a decline in sales, or reduced 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 thrive in a 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.

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