Simon England, Managing Director, Equals Money

With relatively small margins, market share, and capital pools, there is little to buffer Britain’s small and medium businesses from the complex economic crisis.

Recently, the Bank of England announced its sixth consecutive interest rate increase – the largest since the Bank was made independent in 1997 – and announced that the UK will enter its longest recession since 2008 in the fourth quarter of this year. The Monetary Policy Committee forecasts that several more months of significant inflation will reach a peak of 13.3% in October and that growth will remain negative for most of 2023.

Unfortunately, businesses – hardened by years of Covid and Brexit related disruptions – must now contend with a new range of challenges. To understand how these economic factors are affecting the nation’s businesses, Equals Money conducted a survey of 1,000 decision makers. Here is what business leaders are saying and advice on what they can do to address today’s economic issues.

What do the BoE’s moves mean for businesses?

The Bank of England’s recent rate hike will have several concrete, short-term impacts on businesses. The first that many will notice is an increase in repayments for loans, company cards, and mortgaged properties, among other things. All businesses will likely take a hit to their profits as a result.

Businesses that were considering borrowing money to fund growth will also have a tougher time convincing the bank to lend them money. Businesses seeking funding should expect more stringent criteria from banks and need to take this into consideration when borrowing.

Consumer behaviour will likely change. Just like businesses, consumers will also face higher repayments and mortgage rates and rising cost of utilities – and this will mean that they have less money to spend. Many businesses are likely to experience a short-term drop in sales, but they may see a wave of demand when interest rates lower.

Businesses also need to consider the impact on currency. Theoretically, a higher interest rate pushes the value of a currency up, but as we’ve seen recently, reality is often rather more complicated. Given that the central banks of the G10 countries tend to move as a herd, it’s likely that many overseas employees and suppliers will be facing similar issues to those based in the UK.

The top challenges for businesses

Our data from a recent survey of 1,000 business leaders across the UK, shows that businesses of all kinds are facing a range of issues. Fewer than one in four could agree on any one challenge as predominant. The most common issues listed by businesses included rising energy prices (22%) and supply chain issues (20%). These were closely followed by three issues with 18% each: late payments from customers or suppliers, reduced customer demand, and rising interest rates.

 The rising cost of doing business is particularly concerning, as it builds on years of cost increases associated with the pandemic. More than half of businesses, 55%, said their costs have increased consistently since 2020. Businesses are increasingly concerned about the future of their business with 21% of business leaders already anticipating they will have to close their businesses due to economic factors.

 The cost-of-living crisis is another major concern for businesses, with a near-unanimous 97% of business leaders experiencing challenges stemming from it. Concerns related to the rising cost of living include its negative impact on consumer demand (37%), challenges meeting growth targets due to reduced sales (35%) and rising employee turnover (35%).

 What can businesses do to address these challenges?

Unsurprisingly, the vast majority of British businesses (91%) are already taking some form of action. Almost a third (32%) of decision makers say that their organisation has already pivoted its business model, and a further 33% are currently looking into the possibility. More than one in four businesses owners, 27%, are considering selling instead.

Decision makers can’t control what happens in the market, but they can address risk and take steps to isolate their organisation from the worst of the economic crisis. Shoring up the company should begin with a comprehensive spending review. A full understanding of the business’s outgoings is a prerequisite to making the right cuts.

If they haven’t already, businesses should also switch to money management services, that make it easy to carry out regular reviews, since this increases the chances that an issue will be caught and addressed early. Maintaining a close eye on the books and responding quickly and appropriately will give a business a major advantage, even in challenging economic circumstances.

Next, businesses need to examine their supplier relationships. Persistent supply chain issues and fluctuations in exchange rates may have changed the value proposition offered by suppliers. Here, businesses need to take a big-picture view. For instance, low unit prices from an overseas vendor are attractive, but is that supplier still the best choice once you factor in shipping and customs?

This process should also be applied to the services that a business uses. One in three businesses, 33%, listed changes here as a major issue. Many businesses use at least one subscription service, and over half of businesses pay for these in a foreign currency – usually US dollars or euros. As these currencies fluctuate, paying through the banks may no longer be the most suitable option.

High street banks offer the convenience of many services in one place, but they’re rarely the cheapest or most flexible option available. For businesses with specific requirements or a need for a regular service, it’s often worthwhile to find a dedicated partner. There are many loans, foreign exchange, and expense management solutions available, and they typically offer better rates and service than the banks.

Troubled times ahead

It puts the contemporary challenges in perspective to understand that over one in five businesses is at risk of going under. One of the common lessons learned during the pandemic remains true: adaptation is the only way to overcome unexpected issues. 

‘Business as usual’ is simply not an option – organisations must make bold decisions to succeed against today’s economic backdrop. So many businesses effectively overcame the challenges associated with Covid and Brexit, and whilst we are still experiencing ongoing challenges related to these events, businesses can and will be successful in navigating this economic downturn with the right measures in place.