By Sean Brophy, below, Head of SME Debt Finance, Triple Point
The UK’s variety of SMEs account for three fifths of employment and around half of the turnover in the UK private sector. What happens then, when volatile economic conditions, a looming recession and double-figure inflation mix with rising interest rates to create a perfect storm for the British businesses which make up the foundation of the country’s economy?
Businesses depend on regular injections of capital to modernise and invest in staff, technology, and real estate –the key ingredients needed to supply continued growth. This is especially prescient at a time when many businesses are looking to partake in the green transition and quickly reach net-zero targets.
When interest rates are volatile, much-needed capital is more difficult to come by, stifling growth and removing the ability for businesses to modernise. While higher rates might just be a terminal phenomenon replacing the low-rate environment of the past decade and a half, businesses are in dire need of certainty to plan effectively.
How did we get here?
Long before we reached current inflation levels and economic turmoil catalysed by political volatility, many of the UK’s SMEs were busy trying to digest a toxic cocktail of financial pressures. Rising costs due to supply chain disruptions, recruitment/staff retention difficulties, energy cost rises and the effects of the pandemic put considerable stresses onto businesses, forcing them to take out loans to maintain liquidity.
Now, these once seemingly cheap loans are complicated by an interest rate environment which has changed quicker than anyone would have anticipated. Repaying these variable rate loans is proving more expensive by the month and the insecurity around the UK economy is making it increasingly difficult to price rate fluctuations into forward planning.
Effective forward planning is critical for growth and investment. When this is made more difficult, companies are forced to act more conservatively and take fewer risks. Businesses are forced to keep the delicate balance between cutting costs and passing them onto their customers, many of whom will be other SMEs juggling with the same issue.
What does this mean for lenders?
Ever since the 2008 crisis, banks have been less willing to provide business loans to SMEs, opting to focus on lower-risk, asset-backed funding instead. Since then, a variety of private lenders have stepped in to plug this dramatic funding gap and ensured that UK businesses can grow in a sustainable manner.
Many of these non-bank lenders rely on banks or other credit partners for their funding, meaning that their loans tend to come with variable rates. The current interest rate uncertainty is making it more difficult for SMEs to opt for these loans when the repayment cost is liable to undergo further fluctuations in coming months and years.
Likewise, lenders are having to be more cautious and manage their own risk exposure in the current climate. This means many SME-based lenders may opt to lend purely against the asset base of a company, which will severely limit debt funding options. Given much of the UK is an asset-light, service-based economy, this could result in a restriction in terms of debt finance availability.
Providing certainty in uncertain times
There are exceptions, however. Triple Point is a pure cashflow lender which prides itself on its close relationships with SME partners. As a result, there are a variety of positive credit opportunities for SMEs with a proven business model and strong management teams, despite the volatile macro-economic landscape.
Due to its diverse funding model, Triple Point can provide fixed-rate loans to businesses, making it easier for management teams to plan and focus on achieving their long-term business goals. Providing this certainty is very rewarding for us, especially against a backdrop of economic headwinds. Access to much-needed finance is vital for our businesses and key to the UK’s economic growth.
When asked earlier this year, almost 80% of UK business leaders said they were worried about the impact of inflation and rising energy bills, while over half were pessimistic about the UK economy’s outlook in general. The ability to allay at least some of these fears is why non-bank, fixed-rate lenders are key to weathering the macro-economic storm.
