By Ion Fratiloiu, Chief Commercial Officer at Channel Capital Advisors LLP

The cost-of-living crisis is often portrayed as a consumer issue, but its impact on businesses has been huge. Globally, companies are having to tackle higher energy bills, overheads and supply chain costs, while also looking to support staff amid higher inflation.

Naturally, smaller businesses with tighter finances and cash reserves, are likely to fare worst in the current financial climate. A report from PayPal earlier this year found that more than three quarters (78%) of small businesses cite the rising cost of living to be the biggest threat to their business over the next year. Consequently, many SMEs have entered ‘survival mode’ as longer-term financial planning and growth become increasingly difficult.

One of the most pressing concerns within this multifaceted problem is soaring inflation – currently sat at 9.9% in the UK. Expected to get worse before it gets better, inflation has pushed up costs across the board. Increased rent, bills and cost of goods, supply chain issues, and higher wages to support employees are just a few examples of how inflation has hiked up costs for businesses.

Meanwhile, as their own costs increase, many businesses are staring at the bleak reality of declining customer demand. Whether a B2B or B2C model, the squeeze on finances will result in reduced spending, which could mean revenues fall at the same time as overheads rise.

This all paints a rather bleak picture, but we should never underestimate the resilience and entrepreneurism on display. From the global financial crash, to Brexit, to a pandemic, SMEs across the UK have fought off other storms over the past 15 years. What matters right now is how we can best support them through this particularly challenging financial landscape.

After all, SMEs are the backbone of the economy, accounting for 60% of GDP and the main source of job creation, so providing access to funding has never been more important.

How are SMEs reacting to economic uncertainty?

In an effort to weather the cost-of-living crisis and maintain normal operations, we are seeing businesses implement a number of measures.

Despite the knock-on effect of damaging customer confidence, raising prices is often an unavoidable necessity. According to a Barclays’ report earlier this year, 51% of businesses were concerned that increased living costs would impact consumer spending, and 28% feared it would make them less competitive as they would need to increase prices. Meanwhile, the immediate inflationary concerns have made it challenging to establish any sort of long-term growth plans.

Indeed, in many cases additional finance will be required. This could be for several reasons, such as investment into overall operations for innovation, digitalisation or upskilling, or just aiding cash flow to stay competitive. Whatever the reason, it is important that decision-makers understand all options available to them so that they can make an informed decision on what best suits their needs.

Traditional bank loans remain the most common form of small business lending. EY found that 63% of SMEs still using traditional banks for their financial needs. However, recent Channel Capital research has revealed that the competition is growing, with 59% of SMEs prepared to work with alternative lenders.

It is certainly not difficult to gauge why this trend has gathered momentum. The effects of the cost-of-living crisis have resulted in an increased demand for financing, with the speed and flexibility of the products on offer of greater importance than ever before. Indeed, smaller businesses are not being sufficiently catered to – a third of SMEs in Europe cannot obtain finance.

The biggest barrier in acquiring a traditional bank loan is changing risk appetite. In the post-Covid world, many banks are reluctant to provide long-term financing to SMEs due to their perceived high-risk level. At the same time, financing processes are accompanied by delayed and impersonal legacy services, as many banks have failed to truly embrace the full potential of tech-based digital lending.

Consequently, this space is being filled by fintechs, which have been able to modernise and simplify the sector through frictionless procedures and investing in technical development.

Financing SMEs through innovative tech

The advent of new, innovative digital technologies has created an alternative pathway towards a smoother and more efficient lending space for businesses.

Digitally led financial options enable businesses to accelerate their growth through quicker, easier access to funding, with more robust and transparent risk and credit processes. The use of intelligent APIs, Open Banking, and cloud-based technologies can more easily provide much needed finance to small businesses by seamlessly transmitting, digesting, and analysing data for frictionless lending.

Meanwhile, newer technologies such as artificial intelligence, big-data analytics, and machine learning are used to understand and predict the behaviour of small businesses to assess the lending opportunity in line with risk parameters. These technologies enable the analysis of far greater data than traditional methods, allowing lenders to consider a broader range of factors, from a variety of data sources, in considering the borrower’s application. They also allow lenders to consider more non-traditional data than legacy lenders can, opening up borrowing to small businesses who may have been rejected by the big banks. These advances also mean digital lenders can match the SME funding need to the risk appetite of investors – which is particularly advantageous for businesses with a limited track record in raising investment.

This use of data-driven decisioning through front-end processes allows for faster, simpler, and cheaper credit decisions, reducing the need for physical documents. Certainly the added efficiency will be crucial for some businesses undergoing financial strain due to the economic climate, with 66% of SMEs questioned by EY interested in access to faster credit.

These are challenging times for small business leaders, and trying to create long-term business plans under current economic conditions has become an increasingly difficult task. Businesses will have to make sacrifices such as raising prices and scrapping growth plans, but this may not be enough. Therefore, quick and efficient access to finance for SMEs is vital.

The silver lining to the cost-of-living cloud is the proliferation of fintechs within the SME lending space. Indeed, this is an opportunity for digital lenders to display the value and importance of innovative, disruptive financial tech solutions – we can make it faster, easier and fairer for worthy businesses to access the capital they need to survive and thrive.

About Author:

Ion Fratiloiu is the Chief Commercial Officer at Channel Capital Advisors LLP. Channel delivers better financial results for its partners and their B2B clients with non-dilutive capital. Over 15 years, it has managed over $20 billion of credit assets including loans, working capital facilities, and securities, as a UK-based, FCA-authorised and regulated asset manager.