iwoca SME Expert Index: SME confidence makes a cautious comeback

There are signs of confidence returning to the UK’s 5.5m small and medium-sized businesses and the lending market they rely on, in the latest iwoca SME Expert Index latest report finds.

The new research, carried out with over one hundred SME finance brokers who collectively submitted over 2,500 SME finance applications in March, reveals that worries about a recession are at their lowest level in a year. While three in five (63%) brokers reported concerns from SMEs about a future recession, this is down from a high point of nearly four in five (77%) in Q2 2022.

Worries about recession have also dropped from being SMEs’ second biggest overall concern, to their fourth, since Q4 2022, with half the amount of brokers selecting it as the top concern compared to last quarter (6% down from 12%). Mirroring this cautious optimism, the data finds that the most common reason for SME loan applications according to over half (52%) of brokers was growth.

This comes as the data shows that nearly half (45%) of brokers have seen increases in the number of loans they are applying for on behalf of SME clients. By contrast, just over one in ten (14%) brokers reported a reduction in loan applications.

Significant headwinds remain for UK SMEs

While the first dataset from brokers in 2023 shows signs of confidence, challenges remain for small and medium-sized businesses operating across the UK.

Three quarters (75%) of brokers said that the SMEs they work with are concerned about their business surviving the increasing costs of energy prices.

More than half (52%) of the brokers iwoca surveyed reported either increased business running costs or inflation as the top current concern for SMEs, up significantly from just a third (34%) reporting the same in Q4 22. By comparison, inflation did not feature in the top five concerns in Q4 22, with only 2% of brokers citing it.

Increasing costs were the most selected concerns by a long way, with far fewer brokers selecting other options such as access to finance (9%), higher interest rates (9%), recession (6%), ability to hire or retain staff (6%) or something else.

These fears coincide with the latest inflation figures from the Bank of England – the UK is experiencing a 10.1% inflation rate, five times the official 2% target.

Small businesses are also worried about the support available to them. Just two in ten (22%) brokers think the fiscal measures announced by the Chancellor in the Spring Budget will have a positive impact on SMEs.

Tough lending environment set to continue

Despite more SMEs applying for loans to grow their businesses, and concerns about a recession receding, data from brokers shows a tough lending environment remains.

More than three in four (77%) report that high street banks are reducing their appetite to fund SMEs. Similarly, four in ten (39%) brokers have seen an increase in rejections of their clients’ applications for finance over the last quarter.

Sam Jones from broker NGI Finance said: “I’m seeing an increase in applications from SME owners who are looking for finance for growth; there’s a big appetite for acquisitions, as well as support for stock purchases and recruitment costs. This indicates that many business owners are more confident they can ride out recession worries.

“I don’t think the most recent budget was particularly aimed at helping SMEs gather momentum after some tricky years; the increase in Corporation Tax, reduction in tax-free allowance for dividend income and the end of support for energy prices will cause concern for businesses who will be hit with higher bills when growth is not guaranteed.

“As businesses are slowly getting used to the increased cost of money, they’re open to a variety of more flexible facilities, to make sure the funding is going to work for them.”

Willem van Lynden, Managing Director of broker Rise Funding said: “We’ve noticed an increase in demand for finance from our small business clients, as well as an increased take up of the offers we’re presenting them with.

“Whilst the fear of recession does seem to be slightly receding, there are also signs that business owners are looking to improve their cash flow and reduce monthly outgoings; they’re asking for longer term loans and even considering secured loans, when previously this was not an option for them.

“I think business owners can no longer afford to hold off on making finance decisions, which they may have been doing during recent uncertain times.”

Colin Goldstein, Commercial Growth Director of iwoca, said: “The lending market for the UK’s 5.5 million small and medium-sized businesses is gradually gaining momentum. With more applications for loans, more businesses requesting finance to grow their business, and recession fears continuing to recede, there are positive signs that the market and health of our economy will improve.

“But while I’m cautiously optimistic, I know the very real challenges SMEs face. I speak to brokers day in, day out; they’re seeing high street banks retrenching, huge pressures coming from the energy market, and concerns about the lack of support from central government.”