ACCESS TO FINANCE FOR SMEs DURING COVID 19

When I undertook the Access to Finance for SMEs review for the Welsh Government seven years ago, the most invaluable source of data for the investigation was the SME Finance Monitor. 

The information gathered by the largest study of its kind in the UK not only provided accurate and timely data on how SMEs were accessing funding from a range of different sources but was also a useful predictor of the state of the small firm community.

Given this, the latest report from the monitor on how SMEs have been impacted by Covid 19 is an invaluable indicator of what has been happening to entrepreneurs across the UK during the recent pandemic with 4,511 interviews conducted between April and June 2020.

Not surprisingly, it found that 87% of SMEs had reported being negatively affected by Covid 19 with the biggest impact being a reduction in sales of more than 50%. 

In fact, six out of ten SMEs were expecting this lower turnover to continue over the next few months with the biggest impact being on smaller SMEs, especially the self-employed. As expected, the sector that had been hit hardest were those businesses in the hotel and restaurant industry.

Whilst reported growth amongst SMEs was stable, the proportion planning to grow had halved from 52% in 2019 to 24% in Q2 2020. Instead, the majority of firms stated that their focus was on improving profit margins within their business and to achieve this, there has been more innovation by all size of businesses.

With the economy shrinking during the second quarter of this year, the use of external finance by SMEs fell to 30%, the lowest ever level recorded by the monitor with most of this decline being in the use of overdrafts and credit cards.

An increasing number of businesses were becoming concerned about their ability to repay borrowings, especially hotels and restaurants, although at the time of the study, government regulations meant that they remained closed during the period of the study.

Given the economic situation, it was not unexpected to find that more SMEs were holding £10,000 or more in credit and that there was an increase in injections of personal funds into the business. There was also a general caution around accessing finance with fewer than half of SMEs happy to borrow either to grow or to get through the pandemic (although it is worth noting that one in four businesses still wanted to be significantly bigger and were prepared to take risks to succeed).

Whilst 69% of all applications made for new or renewed finance in the 18 months to March 2020 were successful, this had increased to 89% during April to June 2020 reflecting, no doubt, the impact of the UK Government’s Coronavirus Business Interruption Loan Scheme and the Bounceback Loans programme.

What is of interest is that the appetite for accessing finance seems to have changed little despite the pandemic with 84% of firms – known as happy non-seekers – not requiring or wanting to apply for more finance in the last year up to June 2020. 

However, the pandemic seems to have changed this considerably with a third indicating they make seek finance in the future although this would depend on economic conditions. 

For those who might be thinking about borrowing but haven’t yet done so, it would seem that either the bank’s processes or active discouragement is preventing them from this. Indeed, confidence that the bank would say yes to a loan or overdraft application was considerably lower than for the same period in 2019.

However, the overall positive message from the study is that for companies subsequently interviewed in July, there are fewer who believe that the worst is yet to come or that they will have little or no income in the next few months. More importantly, the proportion with future growth ambitions has increased slightly along with those in a positive mood about their future.

Therefore, it is not a shock to find that many SMEs have been hit hard by the pandemic and have been reluctant to borrow money although those that have done so seem to have successfully accessed the UK Government’s support schemes. 

The monitor also suggests that SMEs, whilst being hit hard in terms of turnover, have largely weathered the economic downturn through a focus on profits, better credit management and the use of their own personal funding into the business. 

It is also good news that as the economy has been slowly opening over the last couple of months, it would seem that the confidence levels amongst entrepreneurs is growing and more are actively looking to access finance to help their business develop further.