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SMEs to invest £633m in growth over next 12 months

SMEs plan to spend an average of £111,175 on growth strategies, equating to a £633m total spend for all UK SME businesses, despite external factors such as supply chain issues and the ongoing impact of the cost-of-living crisis, according to new research from Aldermore.

35% of UK SMEs are planning to invest in new equipment over the next year. Businesses are also continuing to embrace the shift to online, with 35% planning to improve their online presence and 29% investing in digital marketing.

24% of SMEs plan to diversify into new products and services, while 20% will invest in marketing and events. Meanwhile, 24% will prioritise training for staff and 15% plan to invest in recruitment.

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Aldermore said the willingness of UK SMEs to invest in their business is evident in recent lending figures. Gross lending to SMEs stood at £4.8bn in Q4 of 2021, broadly unchanged from the previous quarter and seeing a £22.6bn total for the whole of last year.

Expanding their customer base over the next 12 months is the main priority for 50% of UK SMEs. Business leaders have had to consider business expenses, driven by the impact of the cost-of-living crisis; 45% of SMEs will be focused on reducing them to lessen the impact on their bottom line.

Other priorities to drive growth include:

  • developing new products and services (26%)
  • improving existing propositions (36%)
  • investing in employee retention (25%)
  • reacting to the sustainability agenda (29%).

37% of UK SMEs plan to fund their investment with business savings. However, despite specialist products being available, many business owners are continuing to dip into their own pockets to fund their investments, with 45% funding growth using products designed for personal use such as overdrafts (11%) or personal lines of credit, such as credit cards (10%).

Tim Boag, group managing director, business finance at Aldermore, said: “It’s encouraging to see that SMEs are planning to invest significantly in their business during the next year. Despite broader economic uncertainty, the cost-of-living crisis and ongoing supply chain issues, business confidence remains high, and SMEs are continuing to look to the future: to their recovery, growth and even transformation.

“However, it’s concerning that many SMEs are relying on products not designed for business use to fund their investments. Business leaders should explore specialist funding options designed with their specific challenges in mind, such as invoice finance or asset finance.

“At Aldermore, we’re focused on supporting SMEs, using our expert knowledge and specialist finance products. We recently created a new tool: the Aldermore BusinessFundingFinder, which allows businesses to answer a few simple questions around their requirements, such as the amount of funding needed, type of lending required and based on their circumstances, it guides businesses to solutions suitable for their needs.”

Source: Best Advice

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Pandemic recovery lifting SMEs’ confidence – survey

Small and medium enterprises (SMEs) are increasingly optimistic as economic recovery from the COVID-19 pandemic continues, according to a study by premium finance firm Premium Credit.

The study found that 37% of SMEs expect their revenues to increase over the next 12 months, with 15% predicting increases of 10% or more. Twenty-six percent expect revenues to fall over the next 12 months, while 18% expect them to stay the same. Twenty-one percent said they do not know what will happen over the next 12 months.

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The general recovery from the impact of the COVID-19 pandemic was cited as the main driver for revenue growth by 58% of firms expecting growth, while 35% said it will be driven by launching new products and 34% by entering new markets.

Among firms that predicted falling revenues, 33% said they are still suffering from the impact of the pandemic, while 32% said they have lost clients, some of which have gone out of business.

Premium Credit’s Insurance Index, which monitors insurance buying and how it is financed, found that SMEs’ savings are being depleted. Twenty-seven percent of firms said their savings fell in the past 12 months, while 20% reported increased savings. For this year, around 5% had no savings, compared to 7% last year.

“Rising confidence among SMEs is good news, but companies clearly still face a lot of challenges in the year ahead and many have depleted their savings as they start to invest,” said Owen Thomas, chief sales officer of Premium Credit. “Premium finance is a very cost-effective way for businesses to buy insurance, and better manage their finances and cash flow by spreading payments. Our research shows nearly six out of 10 SMEs use some form of credit to ensure they can still afford business-critical insurance.”

By Gabriel Olano

Source: Insurance Business UK

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Small business loan vs cash advance: what is the difference?

Small-to-medium enterprises, or SMEs, represent around 90% of all business, and 50% of global employment according to the latest estimated by the World Bank. Small businesses represent the majority of the marketplace, but lenders are less certain about their prospects and so many such companies fid it difficult to secure credit financing.

Two ways in which an SMEs can secure credit are business loans and business cash advances, but what are the differences?

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What is a business loan?

A business loan is a form of lending, geared towards providing a company or other professional organisation with short-term cashflow – whether for growth purposes, or to weather a downturn in finances. Where a traditional personal loan is leveraged against the individual that applies for it, business loans are most commonly secured against the business and its assets.

There are two key types of business loan: secured, and unsecured. Secured business loans utilise business assets as a form of security or “collateral”, which the lender can seize and sell in the event the business cannot pay back the loan. Unsecured loans are more useful for smaller or younger businesses, as they do not require any form of asset security to set up, but at the same time generally come with a higher interest rate to compensate for the additional risk to the lender.

What is a business cash advance?

A business cash advance is a form of lending based on a given business’ existing and projected card revenue. Cash advances are generally a fixed sum with a variable repayment rate; a lender will examine your cashflow and potential future income from card transactions, and offer you a percentage of that card volume as an advance payment. Repayments are variable in relation to your actual monthly card volume, where you pay less on months with fewer transactions.

What are the differences?

Business loans and cash advances share some core traits in common, but generally serve different purposes. They are both key forms of borrowing for growing and established businesses, presenting the opportunity for sustainable growth with shrewd financial planning. However, they also have some crucial differences that are well worth understanding before making any major decisions on behalf of a business.

Firstly, business loans are a long-term form of lending. Though it is possible to take out short-term business loans, a majority include repayment terms of a year, 18 months or longer – with the ceiling for repayment periods at 25 years. Cash advances are typically shorter-term, and can often be organised more quickly.

While repayments for business loans are regular each month, the amount you repay in total could change depending on the rate of interest on the loan. Meanwhile, business cash advances are for an agreed fixed sum with repayments taken as a proportion of revenue, so the final bill will not change but it may take more or less time to pay it back and the monthly cost will vary depending on revenues.

Source: Descrier

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Levelling the playing field for small businesses

Scotland’s smaller businesses continue to face a range of challenges amid the ongoing pandemic, but as the mood shifted towards recovery last year, we saw a notable upturn in the demand for finance. Equity investment, in particular, provided companies in Scotland with a platform for growth and development.

According to new data, published by the British Business Bank in its eighth annual Small Business Finance Markets report, equity investment in Scotland’s vibrant community of smaller businesses had soared to £403 million by the end of September – more than double the same period in 2020. A total of 147 equity deals were recorded, equating to 8 per cent of the UK’s equity deal activity – higher than Scotland’s 6 per cent share of the business population.

Across the rest of the UK, there was a similar increase in equity investment, with overall equity deal values on track to double from the £8.8 billion total seen in 2020. By quarter three, Scottish investment was already 42 per cent ahead of the total £283m registered during the full 12 months of 2020.

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Despite the positives here north of the border, our research highlights that geographic imbalances remain across the UK with external finance concentrated in London, where firms attracted 70 per cent of 2021 Q1-Q3 investment value. This only underlines the importance of ensuring that smaller businesses at any stage of growth can access the funding they need to achieve their goals, regardless of their location.

Helping to address this, alongside a range of programmes already in place, the UK Government announced £150m to provide a new fund for Scottish businesses as part of the October 2021 Spending Review. It will be administered by the British Business Bank and we will be working closely with Scottish Enterprise, the Scottish National Investment Bank and other local stakeholders to deliver this increased support.

As well as the increase in equity deals, the study also showed us that bank lending is close to returning to pre-pandemic levels. In terms of post-pandemic recovery, the British Business Bank’s report suggests there could be continued economic recovery throughout 2022, with strong demand expected for investment to fuel business growth. Although 2022 may still provide a challenging environment for some businesses, many others report that they are seeking to pivot towards growth, improve productivity and transition to a net zero economy.

Providing access to finance will play a big part in ensuring the UK economy continues to grow sustainably, but there are also a number of factors we need to consider that might prevent certain individuals or groups in society from being able to access funding. For example, that the report reveals that while ethnic minority-led businesses are more open to using finance, and more ambitious for business growth, access to finance remains an issue, and they are twice as likely to see access to finance as an obstacle to running their businesses. Additionally, the appetite for using external finance among female entrepreneurs has significantly increased, but it remains lower than for smaller businesses run by men.

The need to level the playing field, both in geographical terms and across under-represented groups is clear. We are committed to supporting entrepreneurs to overcome any hurdles they might face, whether it is knowing how to apply for finance, understanding what types of finance are available to them, or supporting them with the applications process.

For some, 2022 may be another challenging period for their businesses. However, we know that many are tentatively optimistic, still targeting growth and have big plans to make their ambitions a reality after two very uncertain years. Improving access to finance can only help smaller businesses to get there and our aim for this year is to help them on that journey.

By Mark Sterritt

Source: The Scotsman

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SMEs struggling to find funding and time to deliver sustainability ambitions

A survey of more than 2,000 UK-based small and medium-sized businesses (SMEs) has found that most are feeling pressure to improve their sustainability credentials, but one-third believe it will be too expensive for them to take action this year.

Conducted late last year by tech and software firm Sage, the survey covered 2,040 decision-makers at SMEs in the UK, with the results being published this week.

Half of the respondents said they see sustainability as “important” to what they do, with 13% describing environmental issues as “business-critical”.

Yet just one-quarter of the respondents said they expect their business to become more environmentally sustainable in the next 12 months. The most common challenge to implementing measures to improve environmental outcomes was cost. One-third of the survey respondents said they think the changes they want to make would be too costly to implement at present – particularly with the costs of raw materials and energy increasing.

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The other most common challenges were found to be a lack of time to dedicate to sustainability, cited by 27% of respondents, and a lack of in-house skills, raised by 25%. This latter point resonates with separate, recent research from the SME Climate Hub, which polled 194 SMEs and found that two-thirds do not believe they have the right skills and knowledge in-house to reduced emissions and build climate resilience.

Many of the businesses surveyed by Sage acknowledged that failure to show sustainability leadership could prevent them from meeting the changing demands of key stakeholders. Almost one-third (29%) said they feel pressure to become more sustainable from customers, while 26% feel pressure from the UK Government and 23% feel pressure from their staff.

Common pressure areas include talking publicly more about the overall impact of the business, and providing more evidence that products and services are low-carbon or otherwise bear some kind of ‘green’ credentials.

The findings broadly echo those from a separate, similar study conducted by bank NatWest, which published its results in January. That study revealed a drop in the proportion of SMEs positioning environmental sustainability and a priority issue in the short term, with Covid-19 and the energy price crisis taking precedence.

SME support

The UK Government has already published guidance on how SMEs can and should measure and report emissions, following a call to action from Prime Minister Boris Johnson in May 2021.

Other supporting tools include an online hub enabling businesses to access practical information on how to approach the net-zero transition, from O2 and the British Chambers of Commerce; and the SME Climate Hub, which recently worked with CDP to launch a new framework for measuring, reporting and reducing environmental impacts.

And, just this week, Small Business Britain has launched a new education programme in partnership with Oxford Brookes University.

The new ‘Small Business Sustainability Basics programme’ is a free, online, six-week short course that will run from March to May 2022. It will help SME decision-makers to understand their role in the net-zero transition and how they can leverage the money-saving and growth opportunities of reducing their environmental impact and innovating products and services.

By Sarah George

Source: Edie

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UK SMEs to bolster employee numbers following promising start to 2022

Two in five (40.0 per cent) small and medium-sized businesses in the UK plan to hire, on average, six new employees before the end of March, following a promising start to the year, according to the latest quarterly Barclaycard Payments SME Barometer.

The news comes as 56.2 per cent of SMEs report a rise in earnings in the last quarter of 2021 against the same period in 2020. Data from Barclaycard Payments, which processes £1 in every £3 spent in the UK and services over 350,000 SMEs, supports this trend – with transaction volumes up 42.3 per cent for in the last three months of 2021, compared to the same period in 2020.

2022 has started positively for many SMEs despite concerns around economic uncertainties, with almost three fifths (58.1 per cent) predicting an increase in revenue this quarter compared to the same period last year when the UK was in the third COVID-19 lockdown.

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On average, businesses forecast a year-on-year increase in Q1 turnover by 13.5 per cent. Perhaps unsurprisingly, hospitality and leisure operators – whose physical premises were closed this time last year – expect the largest turnover increase (33.6 per cent), followed by retail (16.5 per cent), transport and distribution (14.6 per cent) and financial services firms (11.2 per cent). This is likely due to the impact of coronavirus settling and SMEs feeling more confident to invest or seek investment – evidenced by 32.7 per cent of UK SMEs who plan a ‘high level’ of investment in their business over the next 12 months.

Year-on-year payments volumes also demonstrate a feeling of confidence amongst SMEs across the UK, with leisure and entertainment, food and drink and retail SMEs seeing an increase by 471.0 per cent, 110.8 per cent and 54.1 per cent respectively.

Overall, there is a quiet confidence among small and medium-sized company leaders, that they are on track to have a positive finish the financial year, despite a broader atmosphere of uncertainty among rising inflation, the cost of living on consumers and the lingering impact of the Omicron variant.

The research, which polled 577 senior staff working in UK SMEs, found that overall business optimism is beginning to build, scoring 55 out of a possible 100, up from a low of just 40 points in Q2 2020. This quarter equals the highest levels recorded (with Q1 2020, Q2 2021 and Q3 2021 recording 55 each), since the Barclaycard Payments SME Barometer started in February 2020, before the first lockdown.

Yet, while almost half (48.7 per cent) are optimistic about the outlook for their firms, confidence in the broader economy is less pronounced, with those reporting a neutral sentiment (39.6 per cent) outweighing those who are optimistic (23.8 per cent).

Just under two thirds of SMEs (64.6 per cent) are worried about a rise in the cost of living and inflation and a similar proportion (66.6 per cent) highlight a feeling of nervousness about increases in their energy bills, with four in ten (39.4 per cent) stating that it will impact their ability to remain competitive, while 9.5 per cent will reconsider the need for a physical retail outlet as a result.

When asked to select the number one challenge for this year, SME leaders now view the rising cost of living as a bigger headwind than the ongoing uncertainty around the pandemic. Over a tenth (10.6 per cent) of the respondents to the Barclaycard Payments study selected a rise in inflation as the issue causing them the greatest concern, this was followed by the stability of the domestic economy (10.2 per cent) and the difficulties associated with COVID-19 (6.6 per cent). In contrast, SME leaders ranked the pandemic (22.0 per cent) as the biggest challenge of 2021, followed by the domestic economy (8.2 per cent) and the cost of materials (7.8 per cent).

As a result of the challenging economic backdrop, SMEs have a mixed view on how this will impact consumer spending throughout the year. While four in 10 (41.7 per cent) SMEs expect it to fall, a further 29.2 per cent believe that, although shoppers will spend cautiously, they are likely to spend more on loved ones to help lift their spirits.

Colin O’Flaherty, Head of Small Business at Barclaycard Payments, said: “Small and medium-sized businesses have had a positive start to the year and it’s encouraging to see so many seeking to add to their workforce. SMEs are also remaining resilient by continuing to focus on areas within their control, such as by improving their operating models to overcome the hangover to supply chain disruption which peaked at the end of last year.

“The coming months will no doubt present continued challenges for British SMEs and the impact of rising costs will remain front of mind. Businesses will need to call on the same spirit for innovation and specialised support that has propelled them through the last two years.”

Jo Fairley, Co-Founder of Green & Blacks and SME Investor said: “The strong start to the year for British small and medium-sized businesses, who are looking forward to an average anticipated uplift of 13.5% in earnings over Q1, is really great news. But it comes at a time where two thirds of SMEs are also acutely aware of the challenges posed by the rising cost of living, inflation and energy bills – potentially a perfect storm.

“From my own experience running multiple ventures, I know all too well that trying to weather economic turbulence while growing a business can be daunting on top of the day-to-day fire-fighting. Nevertheless, the last couple of years have shown that the British consumer is keener than ever before to support smaller and local businesses, and this should prove really positive for SMEs, helping them not just to cope but go grow in the months ahead.”

Earlier this month, Barclays launched a package of support aimed at boosting small businesses, with the bank set to host 50 masterclasses a month this year, which will focus on managing cash flow, business growth and support for wellbeing. The classes are open to all small business owners, with national events focused on the hospitality and care home sectors.

Source: The Manufacturer

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SMEs start looking for larger loans

Small- and medium-sized enterprises (SMEs) are beginning to look for larger loans of £100,000 or more, as they seek to scale after the disruption of Covid-19.

According to the latest SME Expert Index by business lender Iwoca, in the third quarter of last year loans under £25,000 were the most popular among SMEs. However by the fourth quarter, the majority of SMEs were seeking loans of £100,000 or more.

Iwoca noted that the shifts in priorities reflect a change in confidence in the economy over the past year.
In the first quarter of last year, just 25 per cent of brokers said that their SME clients were borrowing money to fund their growth, but this figure rose to 43 per cent by the fourth quarter of 2021.

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Fears surrounding Covid appear to be dissipating, with just nine per cent of brokers saying that recovery from lockdown or closure was the reason that SMEs were requesting finance.

Over a quarter (26 per cent) of brokers told Iwoca that loans valued between £100,001 and £200,000 were the most commonly requested among their SME clients in the fourth quarter of last year.

Meanwhile, demand for smaller loans have fallen by 15 per cent, quarter-on-quarter.

“This quarter’s SME Expert Index indicates growing confidence among small businesses, who have endured the blow of the Omicron shock,” said Colin Goldstein, commercial growth director of Iwoca.

“After two years of uncertainty, SMEs are now able to set their sights on growth – an encouraging sign that the mainstay of the UK economy is on its feet once again.

“We need to continue to support small businesses in accessing finance, to power this growth and contribute to a meaningful economic recovery.”

By KATHRYN GAW

Source: P2P Finance News

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Glasgow ranked top UK location for small businesses

Glasgow has emerged as the best city to work in for a small business in Britain, according to new research compiled by small business lender iwoca.

It ranked areas using Office for National Statistics data on average wage, commute, job density, house price and growth of the number of small businesses.

Glasgow topped the list, scoring highly on the shortness of the average commute and the growth of small businesses in the city since 2016.

Glaswegians spend on average 29 minutes commuting between work and home, compared to 50 minutes in Richmond upon Thames.

Between 2016 and 2021, the number of small businesses in the city also increased by 49%. With its burgeoning finance, technology and industrial sectors and plans to build a new Glasgow Metro, iwoca said the city is a natural centre for small business jobs in Scotland.

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Dundee came 7th in the top 25, scoring highly on the growth of small businesses in the city since 2016 – boasting 50% growth – but poorly on average hourly wage and job density, where it ranked outside the top 100 and 25 respectively.

Although a major centre for tourism, Edinburgh lagged behind Glasgow and Dundee on the growth in the number of small businesses, which increased by 32% between 2016 and 2021, ranking outside the top 50 in Britain for this measure.

With its high house prices and long commute times, London did not appear within the Top 25.

RankLocal AuthorityCommuting time (minutes)Average hourly wageJob densitySME Growth 2016 to 2021Average house price
1Glasgow29£19.191.0448.60%£185,595
2Manchester29£19.241.1852.86%£203,250
3Derby23£20.120.9837.28%£175,000
4Liverpool29£17.900.8947.65%£145,877
5Newcastle upon Tyne30£18.431.0245.72%£175,000
6Dundee22£17.670.8549.61%£165,600
7Crawley23£20.481.4248.12%£310,000
8Southampton26£19.910.7762.78%£226,000
9Warrington25£18.631.1842.29%£212,000
10Salford28£17.740.8962.47%£190,000

Francesca Cingano, owner of Glasgow-based Italian catering business Cateritaly, said: “Moving from Italy to Glasgow in 2014 to set up an Italian catering business was the best decision I have made.

“Strangers have gone out of their way to help us solve business problems, commuting around the city is super easy and the council have been incredibly helpful assisting us with health and safety measures, and hiring new apprentices.

“In this environment, we are excited to continue to grow, scale and hire over the coming years.”

Christoph Rieche, iwoca’s co-founder and chief executive, said: “The pandemic has fundamentally changed the life choices we make – it has changed the way we work, where we want to be based and has made many people across the country consider if their current career or company they work for is the right one for them.

“The big corporations grab the headlines and have the profile, but it’s the small businesses who are making this country tick.

“It’s really fantastic to see Glasgow featured as the top spot for SME jobs.”

By Peter A Walker

Source: Insider

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How small businesses are coping after two years of lockdowns

With Plan B measures easing this week, Britain’s small businesses are beginning to look forward, cautiously, to running in a more ‘normal’ fashion.

However, the landscape for these companies — which make up over 99% of UK businesses — has changed unimaginably in the two years since Covid first hit our shores.

The long months of closures, restrictions and constantly changing guidance have taken their toll on SMEs in every sector.

One study from business insurer SimplyBusiness suggests that, on average, small businesses have lost over £20,000 each due to the virus.

Now business owners are concerned about an impending rise in National Insurance, spiralling inflation and the tapering-off of the final coronavirus support schemes.

But despite storm clouds on the horizon, Mike Cherry, Federation of Small Businesses national chairman, says there is optimism in the sector, with more than half of small firms planning growth this year.

‘After two years of turmoil, in which firms have once again shown their adaptability and resilience, the small business community stands ready to spur our economic recovery.

The majority intend to grow over the coming 12 months, and many are looking to increase headcounts,’ he says.

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How small businesses have been affected

The latest government statistics make for sobering reading. The number of private businesses in the UK had been steadily rising until coronavirus came along, then shrank 6.5% in the calendar year 2020 to 2021.

‘One-man band’ businesses are the most likely to have closed, while large businesses only declined by 1%. While there are no more up-to-date statistics on this measure, there is evidence that the situation has worsened since.

The number of businesses removed from the government register was up 24% on the average in the first three quarters of 2021, suggesting a further wave of closures.

The cost has also been huge for those small businesses that have survived. Bank of England figures show that SMEs are now 25% more indebted than they were before the pandemic, because they have borrowed in order to survive. The Bank warned that these debt-laden businesses are vulnerable and that there will be more insolvencies ahead.

The wellbeing of entrepreneurs and small business owners has been badly affected. Alan Thomas, UK CEO at insurer Simply Business, says that over 60% of small business owners have been impacted by financial worries due to the pandemic, with one in five saying that the pandemic has left them in a ‘bad place’ in terms of their mental health.

‘Small business owners have encountered countless challenges during the course of the pandemic,’ Thomas says. ‘Livelihoods are on the line, and understandably this has had a huge impact on people’s wellbeing, with a staggering 82% last year reporting poor mental health.

‘Entering 2022, it’s clear that many of these challenges remain, from staff shortages to supply chain issues. This worrying situation should concern us all, because small businesses are crucial to our economy and communities, and will be central to our collective recovery.’

Not all small businesses have been affected equally by the pandemic. Figures show that certain sectors and certain areas of the UK have found it particularly difficult.

Looking to the future

There is evidence that the small business sector may thrive again. More encouraging government statistics suggest more than 1,800 companies are being set up every day, with London and the South-East the most popular places to start a business, and the North-West the next most popular region.

The latest Federation of Small Businesses (FSB) survey shows that nearly one in six SMEs increased its number of employees in the quarter to December last year, with 17% hoping to do the same this quarter.

Some sectors, of course, are firing on all cylinders. The technology sector counted 2021 its best year ever, with start-up and scale-up businesses raising a record £29.4billion.

According to the FSB, small businesses in the construction industry and the information and communication sector are feeling confident about the future.

At the other end of the scale, though, retailers, accommodation providers and small businesses in the manufacturing industry are far less confident about what 2022 will bring, pushing the overall score for SME confidence down to a one-year low.

Kay Daniel Neufeld, head of forecasting and thought leadership at the Centre for Economics and Business Research, says Omicron had a ‘chilling effect’ on business confidence in the retail and leisure sectors, while manufacturers remain concerned about supply chain issues and inflation, which has pushed up costs.

‘The share of small businesses reporting that operating costs have increased rose to a decade high of 72.9% in Q4 2021, with greater expenses for inputs, fuel, utility and labour being the main causes,’ says Neufeld.

So, while some businesses are rejoicing in a return to normality or even growing from shoots put down during lockdown, many are still battered by the experience of the last two years, and fighting on all fronts to survive.

The onus may be on the government to ensure the SME sector continues to grow, with Cherry, at the FSB, asking in particular for more funding so that companies can deal with the issues ahead.

‘Come April, they’ll be faced with a jobs tax hike, an increase in dividend taxation and fresh business rates bills,’ he says of his members.

‘We need the government to start looking closely at the policies that will empower the small business community to spur our recovery from this recession, as it did the last. The growth intentions are there, but we need the right support to turn vision into reality.’

By Rosie Murray-West

Source: Metro

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How To Find The Best Business Loan

Whether you’re planning to expand your business with new premises or equipment or to invest in recruitment or marketing, you may be considering taking out a business loan.

To help you decide whether a business loan is the right finance option for you, here we take a look at what they are, what you’ll need to apply for one, and the alternatives, as well as answering some common questions about business loans.

What is a business loan?

A business loan is a form of borrowing for commercial businesses rather than individuals. Some may be more suitable for start-up businesses while others may only be suitable for businesses with a certain number of years of filed accounts.

You’ll usually repay the amount you borrow in monthly instalments over an agreed period of time, with interest on top. Typically, business loans are for amounts from around £1,000 up to potentially millions.

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Are business loans secured?

Business loans can be secured or unsecured. A secured loan is one that is linked to an asset, such as property, vehicles or stock. This means that if you can’t make payments, the lender may take your asset to pay for the loan. 

As there is less risk to the lender, secured loans are usually for higher amounts and interest rates are usually lower.

Unsecured loans don’t require an asset as security so tend to be for smaller sums and come with higher interest rates. Unsecured loans may be more suitable for small businesses without large assets. 

Some lenders will ask for a personal guarantee from a company director for an unsecured loan.

What types of business loan are there?

Some of the most common types of business loans include:

Bank loan

With a bank business loan, you’ll borrow a set amount of cash from a bank or building society over an agreed period of time, with interest.

Government-backed Start Up Loan

This is an unsecured personal loan backed by the government to start or grow your business. To apply for this type of loan, you must live in the UK, be over the age of 18 and have (or plan to start) a UK-based business that’s been fully trading for less than 24 months.

Start Up Loans have a fixed interest rate of 6%, are for amounts of from £500 to £25,000, and you can repay the loan over a period of one to five years.

Short-term business loan

Short-term business loans are aimed at commercial organisations which want to borrow for a few months, rather than years, and don’t want to be tied into lengthy repayments. They can be over a period of weeks or months. However, they tend to charge higher interest rates than other loans so make sure you know what these are.

Peer-to-peer business loan

With a peer-to-peer loan (or a P2P), you’ll borrow money from private investors rather than a bank. You will usually be matched to these investors through an online platform. You may need to pay a fee to arrange the loan, so pay careful attention to any fees, charges and interest rates before committing.

Cash advance

A cash advance business loan (also known as merchant cash advance) allows you to borrow money against your business’ future credit or debit card sales. The amount you repay monthly will be based on a pre-agreed percentage of your card sales, so you’ll pay more when your business is doing well and less when it’s not.

Invoice finance

This is when a lender uses your unpaid invoices as security to lend to you. There are two main types of invoice financing:

  • invoice factoring – you’ll be able to borrow a percentage of the value of your invoices and the lender will collect payment direct from your customers. The lender will then take its costs and you’ll be paid the remaining balance.
  • invoice discounting – this allows you to borrow against the value of your invoices, but you’ll collect money from your customers and then pay your agreed fee.

How do you decide which type of business loan to apply for?

When considering taking out a business loan and deciding which type to apply for, you’ll need to think about:

  • how much money you want to borrow
  • which loans are suitable for your business type – some loans such as Start Up Loans are only suitable for new businesses, while cash advance business loans are only suitable for businesses that generate a certain amount of revenue via card payments
  • how much you can afford to pay back each month, taking the interest rate into account
  • the length of time you’d like to take the loan out for. While it may be tempting to take a loan out over a longer length of time, you may end up paying more overall in interest
  • comparing the fees and charges with each loan you are considering.

It’s important to compare your options and to shop around before committing to an option or lender, looking at the overall costs of borrowing.

What do I need to apply for a business loan?

Before you apply for a business loan, you’ll need to be clear about:

  • the amount you’d like to borrow
  • what you are borrowing the money for
  • how much you can afford to repay each month
  • how long you’ll need to repay the loan.

As with other types of loans, your business’ credit rating is likely to be checked, with more competitive loan terms generally being offered for those with a good credit score.

Some ways to improve your business’ credit score include:

  • checking your credit report and disputing any errors
  • paying bills on time
  • if you’re a limited company, filing full, rather than abbreviated, accounts to Companies House
  • making sure you have enough money in your account to cover any planned payments
  • only applying for credit when you need it. Making lots of applications suggests you are struggling financially. You could ask for a quote instead
  • keeping all of your information, such as your business address, up-to-date. Notify suppliers, as well as Companies House, of any changes
  • avoiding county court judgements (CCJ) as these are recorded on your credit report.

You may also be asked for copies of your business accounts, bank statements, details of profits and loss, tax returns, a business plan and proof of address and IDs of company directors.

Once you have gathered your documentation and have decided on the type of business loan most suitable for you, you can shop around then apply.

What should I consider when comparing business loans?

When comparing loans, some important elements to check are:

  • whether you are eligible for the loan you are considering. Always check the lender’s requirements carefully before applying
  • what the interest rates are for the loan and whether they are fixed or variable. It’s worth remembering that Representative APR means that the rate, or lower, is offered to at least 51% of applicants, so 49% of applicants will likely be offered a higher rate
  • whether your loan provider offers a repayment holiday (a few months off paying). However, taking a break from paying will mean that it will take you longer overall to pay off the loan and you’ll pay more in interest in the long run
  • whether there’s an early repayment charge on the loan.

What are the alternatives to taking out a business loan?

If you don’t think that a business loan is for you, there are other options including:

  • Business credit cards – if you are looking to borrow smaller sums, a business credit card may be suitable. You may benefit from an interest-free period on your purchases. However, always pay your balance off each month to avoid paying interest charges or fees and check what the card’s annual fee and interest rates are after any 0% period.
  • Crowdfunding – this allows you to raise investment, often by pitching your business idea online, in exchange for rewards for the investors you attract. You could sell a stake of your business through equity crowdfunding or offer a reward such as free products or tickets through reward crowdfunding.
  • Overdrafts – your business account may have an overdraft which is either interest free or a low APR. This is usually only suitable for small amounts, though, and you’ll need to check the terms of your overdraft and stick to them.

Frequently asked questions

What happens if I miss a payment on a business loan or can’t pay it back?

If you miss a payment, you’ll have to make up the missing amount as soon as possible. You’ll probably have to pay a late payment fee and extra interest and may have to pay an administration fee too, depending on the terms and conditions of your loan. If you’ve taken out a secured loan, your assets may be seized if you default on the loan completely.

Defaulting on your loan can affect your credit score and how likely you are to be able to take business finance out in the future. The timeframe for defaulting will be detailed in your loan contract so read this carefully. If you can’t pay back your loan, the lender may take legal action to reclaim it.

Do I need to have a business account to take out a business loan?

This will depend on the type of loan you choose and who you want to borrow the money from. If you borrow from your bank, it may be more straightforward as it will know your business history – but always shop around to make sure it’s a competitive way to borrow.

Can I take out a business loan if I have a poor credit rating?

You may be able to take out certain business loans with a poor credit rating, but you are likely to be offered higher interest rates and more checks may be done on your business. You may be more likely to be approved for a secured loan than an unsecured one.

How long will it take to get a business loan?

The length of time it takes your loan to go through will depend on a number of factors such as the type of loan you are applying for, the documentation you can provide, the amount you are borrowing and whether you are applying for a secured or unsecured loan. 

With a secured loan, as an example, you will need to allow time for your assets to be valued.

By Cathy Toogood

Source: Forbes