Concerns rise for SMEs as Bank of England warns UK will enter recession

The Bank of England has hiked interest rates up to 1.75 per cent in the biggest single jump in borrowing costs in 27 years.

In what is the worst outlook for the UK economy since the 2008 banking crash, the bank said the country would enter a recession in the final quarter of this year that could continue for up to a year.

While the downturn is currently not set to be as deep as in 2008, it may last just as long, and individuals and businesses across the board are already bracing themselves for the worst, and small businesses are no exception.

In fact, iwoca’s latest quarterly SME expert index saw 77 per cent of brokers say their small businesses are concerned about the possibility of a recession.

Owner of the small business Storm in a Teacup Gifts Jenny Blyth said she was “terrified” by the bank’s verdict on the economy.

“How are small businesses expected to cope, grow or even survive when the economy is literally crashing down around us?” Blyth asked.

“To improve the economy we need money to be fed through to small businesses, which simply isn't happening.”

According to iwoca’s research, demand for loans – and larger ones – has risen sharply, with small businesses looking to shield themselves from growing uncertainty.

“The current economic outlook for small businesses is precarious – we are seeing signs of an increasing number of SMEs searching for finance solutions to manage their cash flow and brace for the potential of a recession,” iwoca head of broker channel Steven Scoufarides said.

“But, as they’ve proven time and time again, small businesses are resilient and will shield themselves against this economic threat in every way they can; encouragingly, it looks like most are still seeking finance to grow their businesses, rather than to holster it up.” 

The reasons for SMEs applying for finance suggest increasing economic concern, as the number of brokers reporting ‘managing day-to-day cash flow’ as the most common loan purpose rises.

However, growth remains the main reason small businesses are applying for financing.

iwoca co-founder and CEO Christoph Rieche told AltFi that while for some, cash flow is becoming more of an issue and there is a relatively higher demand for financing than there was pre-covid, businesses are continuing to prove resilient.

“What we haven't really seen, on a like for like basis, is the ability for customers to repay being impacted. So we're not really seeing that it affects the credit side of our business, but we do see a lot of additional demand,” Rieche said. 

With the rise in inflation and the ‘post-covid crisis’, a bigger impact on repayments would have been expected, he said.

“Of course, this might come through in the coming months, but so far I think they have been holding up really well,” Rieche added.

“And have been very resilient. And they are a really resilient bunch these SMEs, as we have seen throughout the pandemic.”