External finance is a vital part of the long-term journey of any business.
It’s no surprise, then, that many SMEs use it to reach their goals. In 2020, three in five firms sought external funding, up 16% from the year before. The use of finance in this period was fuelled by the coronavirus pandemic, which saw many businesses relying on government-backed loans (such as the Bounce Back and Coronavirus Business Interruption Loan Schemes).
However, with the pandemic seemingly ‘over’ in the UK, the financial needs of SMEs have changed. This begs the question of how small businesses are using external funding in 2022.
A recent report from the British Business Bank explored the finance market to determine how companies intended to use funding in 2022. The data provides a fascinating insight into the needs of SMEs and what financers must do to support them.
This blog explores the findings in more detail and what it could tell us about demand in the finance market.
The key takeaways
The report from British Business Bank, alongside other insights across the current industry, highlights many significant trends in how SMEs are using finance. We’ve listed the most prominent below.
A move towards growth
Many SMEs entered 2022 with growth ambitions that had previously been set aside due to the pandemic. The Iwoca SME Expert Index, published in November 2021, indicated that brokers were dealing with an increased appetite for growth finance.
With more desire for expansion among businesses, the British Business Bank suggests this should be reflected in an increased demand for finance. However, there is a need for caution.
Some businesses are still reeling from the effects of COVID-19, especially in the hardest-hit industries. There is also the unfolding impact of the current cost of living crisis, which has seen energy and supplies costs rise for most SMEs, and the skills shortage.
Each of these leads to declining customer confidence and business instability which may cause SMEs to halt their growth plans once again. Instead, we may see the demand for growth finance limited and switch to solutions to ease cash flow in trying times.
Bank lending has decreased
Another trend in the last year has been the decrease in bank lending. It isn’t surprising, given that such lending increased in response to the pandemic and associated government loan schemes.
With the effects of the coronavirus weakened and the risk of restrictions lifted in the UK, there has been less need for such support, which has led to a decrease in loans overall.
However, the uptake of equity funding has risen, which could reflect a preference for investment, especially as companies prioritise expansion.
Funding inequality continues
Another recurring theme across the report is the ongoing inequalities in access to funding. While businesses led by women or ethnic minorities were more willing to utilise external finance, they stood less chance of being accepted.
This corresponds with previous studies that found female and ethnic minority owners were less likely to secure funding for their businesses.
The data also showed that 70% of equity investment in Q1 to Q3 of 2021 went to London firms, highlighting regional disparities outside the capital.
Finance is key to accomplishing net-zero goals
Finally, the British Business Bank summarised that increased access to finance for small businesses is crucial to meeting the government’s net-zero goals.
Sustainability has been a growing pressure for many businesses, emphasising companies’ need to do their part in tackling climate change. However, a lack of funding has been commonly cited as a barrier.
Only 22% of SMEs asked said they would use external finance to meet green goals – however, even this could have a sizeable dent in the UK’s contribution to net-zero.
The report also found that 71% of businesses prioritised sales over reducing their environmental footprint. This suggests that there needs to be more education to help SMEs understand the necessity of net-zero and encourage them to make the appropriate changes.
What it means for funding
From the takeaways of the British Business Bank, we can learn a lot about the funding SMEs need in 2022 and beyond.
Firstly, it’s clear that there is an increased appetite for growth amongst small businesses, especially those who feel the pandemic is behind them. External finance will play a crucial role in facilitating this growth, enabling more companies to expand and meet their targets.
However, there are still obstacles to growth which could affect the funding needs of businesses. Many companies face rising costs, supply chain disruption, changing customer needs and skills gaps that could push their growth plans into the background.
Despite the predicted demand for growth finance initially stated for 2022, it will likely be lower as more businesses focus on cash flow. It will also be dictated by how the crisis continues to impact the business population.
In short, those who need growth finance must have access to appropriate solutions, but it’s equally crucial that there are options for companies seeking to survive.
Another clear theme from the findings was the reduced use of lending post-COVID. It could indicate a lack of understanding across SMEs about how loans can support growth and cash flow. This suggests a need for education to teach entrepreneurs about the variety of loans available in the market today and the expansive purposes they can cover.
We are also witnessing ongoing inequality in finance, particularly for women, ethnic minorities and those outside of London, despite the willingness of these businesses.
For better balance, the market needs solutions that improve access. This includes alternative options that suit a more comprehensive range of needs or address the eligibility of minority groups when it comes to applying.
One easy way to tackle this is designing more funding programmes specifically aimed at minority groups, helping them to access the finance they need to establish and grow their businesses. Such schemes help remove disparities across the financial market and lend to a more diverse business population, benefiting communities and economies across the UK.
Finally, if net-zero targets are to be met, there needs to be sufficient funding to empower SMEs. While demand for such support seems to be relatively low, allowing willing ventures to adopt eco-processes and improve sustainability will have a knock-on effect on other companies. This helps to drive innovation and environmental processes across businesses, which will propel the UK’s net-zero pledge and allow us to become an eco-leader.
In summary
2022 has the potential to be a record year for businesses, with the pressures of the pandemic finally easing. It’s easy to expect the demand for external finance to increase accordingly, enabling companies to achieve their growth goals.
However, some issues cannot be ignored. Many businesses are still struggling, whether it be due to the aftershocks of COVID-19 and Brexit or ongoing financial instability.
Due to this uncertainty, it’s hard to predict what finance small businesses will continue to use over the remainder of the year and into the future.
What is clear is that there needs to be increased access to finance for those seeking assistance, including those from minority backgrounds or different areas of the country.
When the government is encouraging businesses to adopt sustainable processes and rebuild the post-pandemic recovery, it is only fitting that the appropriate funding is available to help them do so.
With increased access to finance, more businesses will be able to utilise it effectively and achieve their growth goals, even against a backdrop of economic uncertainty.
At Pegasus Funding, we believe every SME should have access to funding to progress its goals regardless of need or background. Get in touch today to find out how we can pinpoint the ideal solution for your requirements.