SME Outlook Report 2022

As the dust settles on the announcement of a recession, we find out how confident SMEs are about their future prosperity.

Fleximize set out to understand how the unprecedented events of the last two years have impacted the UK’s economic backbone: Small and Medium Enterprises (SMEs). With SMEs accounting for 99.9% of the business population, it should come as no surprise that their survival is integral to economic productivity and prosperity.

The UK economy has fallen victim to the pandemic, the Russia-Ukraine conflict and subsequent hike in energy prices, and, most recently, the cost-of-living crisis and rising interest rates. As the UK enters a recession, we wanted to understand how businesses plan to weather the storm and what support they need.

Given the economic climate, the findings of this report are generally positive; most businesses believe they are financially resilient and are optimistic about the future. However, businesses realise this does not come without sacrifice, with most tightening their belts and making cuts due to their financial situation. In fact, two-thirds recognised that they will likely need to borrow in the next 12 months.

As the market normalises, many businesses supported throughout the pandemic, with government-backed funding, will again be left to fend for themselves as they re-establish their business operations. Though the pandemic may have had many negative repercussions, it also accelerated the shift in how businesses manage their finances.

https://www.bva-bdrc.com/wp-content/uploads/2022/10/BVA-BDRC-SMEFM-charts-Q2-2022-FINAL.pdf

IntroductionThe pandemic expedited the digitalisation of SME banking and borrowing. Since coming out of the pandemic, twothirds of businesses now have access to some form of alternative funding1 and over the past 12 months, 43% of SMEs2 have increased their use of online banking services.

After experiencing the speed and simplicity of online services, SMEs can now feel confident utilising digital finance. Thus, broadening their options and enabling them to take advantage of opportunities that may have been missed in the past. This strongly suggests that SMEs won’t abandon digital technology anytime soon.

Fleximize and its digital peers are well-positioned to support SMEs with an array of funding options, but access to finance is just one part of the picture.

Within this report, we dive into the key issues that make up the full picture; the issues keeping SMEs awake at night, and the obstacles that are impacting their prosperity.

About Fleximize:

Fleximize is a multi-award-winning digital business lender dedicated to providing UK SMEs with flexible finance, done properly. Since launching in 2014, we’ve supported thousands of small businesses with over £300 million in funding.

As well as funding the underserved, we’re on a mission to drive transparency and demystify commercial finance.

Business funding is evolving for the better, and we’re proud to be part of the revolution.

2 https://www.ey.com/en_uk/banking-capital-markets/the-five-step-journey-to-sme-banking-transformation

Stacy Clementson Head of Credit & Underwriting

Commentary provided by:

of businesses say energy price hikes are a major concern

Cost-of-living crisis: the latest challenge for SMEs

These responses make it clear that SMEs are feeling the pressure of many challenges, with only 4% stating they have no concerns and 64% expressing two or more main concerns.

As expected, a distinct correlation was found between companies with a higher turnover and decreased concern about energy price hikes, indicating that smaller businesses are likely to feel the brunt of the challenges as they often face higher financial pressures.

Due to Brexit and the pandemic, supply cost concerns (37%) and supply shortage concerns (33%) are active challenges impacting most SMEs, so it is no surprise to see them expressed by over a third of respondents.

Brexit led to increased costs for business owners as the UK left the single market and red tape increased, making the importing/exporting process more complex and costly. Business owners will likely still need help navigating the new trading environment.

What

It’s interesting to see increasing staff wages as the second biggest concern here. Perhaps this is related to the pressure business owners are feeling to increase the wages of staff in line with inflation to help them through the cost-of-living crisis but are torn because it will be at the detriment of their bottom line.

Stacy

Respondents allowed to select up to three responses.

of businesses are making cuts because of their financial situation 54%

Where are businesses making cuts already?

of businesses will be renegotiating with suppliers, with making cuts to technology a close second at 42%.

The survey also found that female-owned businesses are more likely to make cuts in technology/software, whereas male-owned businesses are more likely to renegotiate with suppliers.

There are a few hurdles that SMEs will have to overcome when making cuts in business:

Renegotiating with suppliers could prove problematic as businesses want to protect their cash flow, most looking for shorter payment terms and increasing prices in line with their own costs. Suppliers may be reluctant to negotiate and even implement stricter credit control measures to reduce customer payment terms, though it requires careful balance not to lose them.

Production costs can also be tricky, with energy price rises hindering this, and moving to cheaper materials can hinder the overall quality of the product or service. This can subsequently have a knock-on effect on buyer demand and potential wastage during production.

It is notable that cutting jobs and wages seem to be the last resort for businesses. Supporting the idea that good staff are harder to come by now or it is perhaps a sign of the loyalty business owners have to the people who support them daily.

Renegotiating with suppliers

Technology/software

Where are you making these cuts in your business?

Respondents allowed to select up to three responses.

How businesses are making cuts by region

76%

of businesses believe they can make cuts without negatively affecting jobs and staff wages.

The survey found that:

In Greater London, businesses are making over half of their cuts through supply chain functions and production, renegotiating with suppliers (21%), reducing production costs (15%), and decreasing supply expenses (15%).

In Wales, businesses intend to make most of their cuts (79%) through renegotiating with suppliers (29%), reducing supply expenses (21%) and making technology/software cuts (29%).

In Yorkshire and Humber, businesses are likely to make half of their cuts through renegotiating with suppliers (29%) and decreasing supply expenses (21%).

In the North West, businesses intend to make over half of their cuts (53%) through reducing supply expenses (27%) and making cuts to staff wages (27%).

In the North East, businesses also intend to make a significant portion of cuts (40%) through reducing production costs. In both the North East and Yorkshire and Humber, businesses have indicated that a third (30%) of cuts will be through staff wages and job cuts.

The West Midlands and Wales appear to be the regions with the lowest threat of cuts to staff wages and jobs.

How businesses are making cuts by region

Greater London West Midlands East of England Scotland South East Yorkshire & the Humber

Wales

East Midlands South West North East North West

Increasing prices is

92%

of SMEs surveyed reported they will pass on costs to the customers, with 1-10% being the most likely increment (38%).

Female-owned businesses appeared to be more likely to increase prices by 11-20%, whereas male-owned businesses are more likely to increase prices by 1 -10%.

Yes (Net) 92%

No 3% Unsure 4%

There are risks involved in increasing prices.

Although most consumers expect price increases, they will review their spending habits as a result. Increasing prices usually negatively impacts the demand for products, so if a business operates in a market that consumers consider a necessity, the chances are the impact will be much lower. But, in markets where the product or service is seen as a luxury, the impact is likely to be greater.

Stacy

Yes, by more than 20% Yes, but undecided

10% 50% 30%

0% 20% 40% 60% Yes, by 1-10% Yes, by 11-20%

38% 34% 12% 9%

inevitable, but by how much?

Will you be increasing your business’s prices to offset rising costs?

What support do SMEs need during the recession?

90%

of SMEs stated they will need support to withstand the recession.

When questioned about what support they will need, 40% expressed that knowing what support is available to them, as well as, any additional financial support could help them weather the recession.

34% also expressed that cost saving tips would be beneficial.

Find your local growth hub: https://www.lepnetwork.net/local-growth-hub-contacts/

It’s clear from the figures that SMEs are feeling in the dark about support available to them; there’s still a lot of work to be done on delivering better awareness.

The pandemic has raised expectations of this because the Government was quick to support businesses financially, which is unprecedented. What went under the radar more was support available locally via LEPs, which was not as widely taken up as BBLS and CBILS because of the publicity around them.

Even pre-pandemic grants were available, area and industrydependent, but often they went unnoticed. SMEs need to be aware, or they could be missing out on critical support.

What support do you think your business would need to withstand a recession, if any?

Stacy

What industries need the most financial support?

of SMEs from all industries expressed that they would benefit from additional financial support.

The top industries that need additional financial support are:

• Manufacturing

• Finance & insurance

• Other services

• Retail trade

• Construction

From the SMEs surveyed in constructions, more than 97% expressed they will need some sort of support, the highest being cost saving tips and additional financial support.

Different industries experience different relative inflation levels (see link), which is likely to be down to the energy price hike affecting some industries much more than others. So, it is no surprise that industries like manufacturing, which are energy-intensive and experiencing an above-average inflation level, require additional financial support.

Food and non-alcoholic beverages & household goods make up a large portion of the retail market. They are likely to struggle partly due to energy and partly due to an expected decline in demand for these more luxury items.

The surprising finding is seeing the Finance & Insurance SMEs in the top three. Although they may struggle as consumers are less able to pay, I suspect they are savvier and planning further ahead, given what they do.

Stacy https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/latest

97% of Construction companies expressed they will need some sort of support, the highest being cost saving tips and additional financial support.

Business owners and managing their finances

of respondents did not class themselves as feeling “very confident” when questioned about business finances.

The pandemic has likely accelerated the need for business owners to become more financially confident, so it is positive to see that a fair share of SMEs do feel very confident. On the other hand, there are still more feeling less confident, so there is more to be done here.

41% stated having access to financial experts and workshops would aid them in feeling more confident managing their business finances. This was closely followed by improving financial literacy.

Could borrowing be the way forward?

Cash flow maintenance and expansion were the primary reasons cited for the need of funds.

Given that running out of cash is the main reason for business failure, businesses must always keep a healthy cash flow reserve. So, it is no surprise that maintaining cash flow and expansion were the primary reasons for needing to borrow.

of SMEs stated they may need to borrow money in the next 12 months. 0% 10% 20% 30% 50% 60% 40%

Borrowing is not always the right choice, nor is it the only choice, but it can help navigate some of the issues facing SMEs in today’s climate:

• Suppliers may be looking to shorten payment terms, and customers may take longer to pay, with all businesses trying to retain cash for as long as possible. Borrowing can help bridge this gap and effectively spread this over a longer time, making it easier to manage.

• Businesses may have a longer working capital cycle due to production times. This means they will be experiencing increased costs for a project before realising the effect of their increased prices. Borrowing can support this.

• Bulk discounts will help mitigate rising prices so to keep costs down business may need funding to facilitate an initial purchase.

• Additional investment in technology could help improve efficiency within a business and bring effective costs down, as could renewable energy sources (i.e., investing in solar).

• A business may want to invest in new product lines to ensure more resilience throughout the recession.

Reason for borrowing

54% 50% 41% 1%

Respondents allowed to select all that apply.

Greater London West Midlands East of England Scotland South East East Midlands

Maintain cash flow Growth/expansion Survive the recession Other 0% 40% 80%

Borrowing by region • Borrowing in the next 12 months • No

As you think your business will need to borrow money in the next 12 months, what do you think this will be for?

of business owners say their business is positive for their mental health 57%

Business ownership and mental health impact

57%

of business owners surveyed felt their mental health was positively impacted by running a business.

Running a business can be challenging but it can also be hugely rewarding to watch something you’ve built succeed.

Given the current trading environment, it’s good to see that most businesses still feel that their mental health is positively impacted, with only 18% feeling that it is having a negative impact on their mental health.

Very positive

Somewhat positive

Neither

Somewhat negative

Very negative

Negative (Net) 18%

0% 10% 20% 50% 60%

30%

19% 38% 25% 15%

Positive (Net) 57% Neither 25% 40% 3%

How positively or negatively do you feel running a business affects your mental health?

Business ownership and mental health support

Respondents allowed to select up to three responses.

36%

stated they do not feel that they have access to mental health support as business owners.

It’s disappointing to see that over a third of SMEs don’t know where to go if they need mental health support. Could awareness be improved?

There are excellent charities such as Mind and the Samaritans and lesser-known ones such as For Men to Talk or WISH for women’s mental health.

Passion for what I do

To make money Financial freedom

To add purpose to my life

Helping the community

It’s good to see that most SMEs surveyed are passionate about what they do, with less than 1% citing no particular motivation. Being passionate is likely to drive business resilience. When times get tough, businesses must dig deep, and it will be a much harder job if they’re not passionate about what they do.

Social status

No motivation in particular Other

0% 10% 20% 50% 60%

30% 40% 27%

No 36% Yes 64% 14% 1% 1%

56% 53% 51% 40%

Do you feel that you have access to mental health support as a business owner?

Stacy

of business owners are optimistic about the future of their business 88%

The silver lining 88%

of business owners remain optimistic about the future of their businesses.

93% of UK SMEs surveyed revealed they believe their business is financially resilient thus being able to handle economic change.

Out of the UK SMEs who believe that they have a resilient business and are optimistic about the future, 30% were in Greater London, 13% in the West Midlands and 10% in the East of England.

Despite the challenges ahead businesses owners appear to be confident in their ability to weather this economic storm.

Not Optimistic (Net) 12% Optimistic (Net) 88%

Overall optimism

Financial resilience to economic change

This is great to see. Business owners should feel positive, they have already weathered the pandemic storm successfully, which could not have been predicted.

Although the recession will be challenging, businesses have already proven how resilient they can be in unpredictable times; with the recession being more predictable, owners should feel that they can do it!

Stacy

33% 55% 11% 1%

0% 20% 40% 80% 100%

Not at all optimistic

60%

44% 49% 6% 1%

0% 20% 40% 80% 100%

No, not at all

60%

How positively or negatively do you feel running a business affects your mental health?

The next 12 months: priorities, obstacles and outlook 45%

of respondents are struggling to find qualified workers while 38% are, simultaneously, struggling with cash flow management and productivity levels.

Recruiting challenges have been reported across multiple industries and countries and has been coined as the “Great resignation”. As a result of the pandemic and the job market recovery, millions of people decided to resign or switch jobs looking for a more fulfilling position.

Companies are now having to work significantly harder to both keep and recruit qualified staff.

When questioned about their financial priorities, 47% of SMEs shared they will be primarily focusing on growth and increasing margins/profits for the coming 12 months.

Main obstacles Financial priorities

Respondents allowed to select up to three responses.

How positively or negatively do you feel running a business affects your mental health?

Final remarks

Given that the UK is currently in a recession and a cost of living crisis, it is positive to see the SME outlook remaining optimistic. The big takeaways of this report are:

Resilience must be sustained. Despite their optimism, SMEs are acutely aware that they will have to take steps, such as renegotiating with suppliers, making cuts, and passing the increase in costs to the customers to thrive within the ever-changing economic climate.

Better support is needed. The report highlights clear areas where businesses require a helping hand to withstand the recession, such as:

• Managing finances

• Funding available (to support cash flow)

• Overcoming the skills shortage, and productivity levels

• Signposting of mental health support available to SMEs

Support from private and public organisations needs to be made available, but most importantly, there need to be open and honest conversations about their financial needs. With most citing a trusted source for where they go for support, these sources must be equipped with the correct information.

There is still an unhealthy stigma around borrowing, deterring businesses from educating themselves about finance. Borrowing does not necessarily mean a company is in hardship, but rather it shows it’s progressive, ambitious, and likely thriving.

Financial resilience is about managing finances, it isn’t a result of not borrowing - the most optimistic businesses predict that they will need to borrow in the next 12 months.

There is no ‘one size fits all’ solution to how you structure your funding, but it’s essential to know your options, whether it be debt, equity, asset, etc. The only way businesses will find out is to start discussing funding more openly. A lack of understanding and availability of the most appropriate options often deter SMEs from applying and can be costly if the wrong product is chosen.

Removing the stigma of talking about finance and driving transparency in the market is something we take extremely seriously, and we’ve only scratched the surface.

Chief executive Officer

Fleximize

Methodology

This report is based on a survey of 273 UK SME owners with a turnover of £120k+ per annum and a trading time of over three years. Research was conducted by independent specialists, Censuswide Surveys, on behalf of Fleximize. The survey questionnaire was circulated between 20 and 26 October 2022.

About Fleximize

Fleximize is a multi-award-winning digital business lender dedicated to providing UK SMEs with flexible finance, done properly. Their mission is to empower small businesses to unleash the potential of their ideas with the knowledge, tools, and financial flexibility they need to thrive.

Since launching in 2014, the lender has supported thousands of businesses with their growth plans across a variety of sectors, from professional services to hospitality.

Flexibility is at the very heart of the lender’s offering; all loans come with top-ups, repayment holidays, and no early settlement fees as standard. Businesses can borrow between £5,000 - £500,000 over 3 – 48 months on an unsecured or secured basis.

The Fleximize team also understands that there’s more to running a business than just good cash flow, which is why they offer a range of complimentary services designed to help UK businesses grow and thrive, such as their Member Marketplace and Knowledge Hub.

Discover more at fleximize.com.