Fintech Solutions to Drive Economic Recovery in the SME Space
By Gabriele Sabato
As a “nation of shopkeepers,” the United Kingdom is an ideal case study for examples of what businesses need to drive an economic recovery amid the pandemic’s slow retreat. While Brexit disruption was anticipated, supply chain issues are now widespread across the global economy. Signs of an economic rebound have been fleeting, quickly overshadowed by fears of inflation and labour shortages that threaten a sustained downturn in the UK. Yet there are ways to adapt. Two British strengths are often overlooked in popular debates: the nation’s shopkeepers and financial technology.
In the UK, 99% of all businesses are small and medium-sized and British leadership in financial technology provides solutions for every business to thrive. Technology has transformed financial services from the back-end at banks to consumer mobile apps. However, for technology to be truly transformative in business, solutions need to be designed for real-world challenges that are both innovative and encourage widespread adoption.
Small and medium-sized companies took on an extraordinary amount of pandemic debt – £213 billion – an 82 per cent year-on-year increase. More heavily indebted compared to large corporations, the confidence of small business owners across the country has also more steeply declined in recent months. In September alone 21,764 court actions were initiated by creditors to recover debts accrued, which was a 51 per cent increase on the last economic quarter. After falling 25 per cent since the start of 2020, insolvency rates look likely to increase whilst businesses must also contend with labour and supply shortages too.
Although insolvency poses a significant threat, the biggest threat to British businesses is, without a doubt, inflation. Inflation touches every part of the economy and could make businesses across the country unsustainable if cost pressures mount. The Bank of England may soon be forced to raise interest rates to curb inflation in order to save them which seems like a Catch-22 for businesses in debt. However, as the bulk of pandemic loans have fixed interest rates any increase will have a marginal impact on the costs for most to service loans. Yet, if businesses are focused on paying back pandemic debt that could detract from necessary investments in future growth, such as productivity, where the UK has long trailed OECD peers. In the near term, a wave of insolvencies could still materialise due to the end of support measures like furlough and serve to further dampen business confidence.
As government support ends, businesses must be leaner and smarter today, drawing necessary capital not only from traditional lenders, but alternative sources of debt and equity investors to drive growth. For financial institutions, the difficulty is finding the ‘zombies,’ businesses that are headed for insolvency and have been artificially kept alive on life support, emergency loans and furlough. The financial system, banks and alternative lenders, have a particular role to play in identifying the zombies through assessment of the need and ability of a business to take on debt and pay it back over the long term. Always a challenge, that is especially the case where many businesses, zombies included, have taken on significant amounts of debt. Unlike zombies, though, most have robust fundamentals and the need for capital is circumstantial with balance sheets impacted temporarily by the pandemic.
Banks’ balance sheets, on the other hand, have weathered the pandemic well in part because of previous regulation, and alternative lenders are sitting on record amounts of dry powder. How effective financial institutions are in the deployment of credit, keeping zombies from accumulating bad debt that only holds the economy back and extending working capital to healthy businesses, will shape the size and speed of the whole recovery. For the UK’s 6 million small and medium-sized companies, finance must be embedded into technology fast.
All businesses regardless of size deserve fairness in access to capital. New technologies have made it increasingly possible for lenders to facilitate business-critical finance that is fast, fair and data-driven. Throwing a lifeline to businesses in immediate need, not the zombies on death’s door, both ensures continued growth and mitigates the risk of an insolvency crisis further down the line with bad debt that could have serious knock-on effects through the financial system.
Now is the time for a wake up call to the lenders that have been slow to change, ensuring all have the tools and technologies to make the right credit decisions. Competitively, implementing the right type of financial technology is a critical issue for lenders, but the lives of millions in the “nation of shopkeepers” are dependent on the outcome. Thousands of small and medium-sized businesses will continue to need working capital amid economic uncertainty.
Equally, businesses must become more aware of their credit profile and consider how this may change based on different business choices. Cashflow issues, to take one example, are well-established as one of the biggest threats to small business and new platforms can reduce payments uncertainty.
Entrepreneurs are the bedrock of the economy and key to unlocking growth. It is incumbent on every business owner to find solutions that mitigate financial risks. And where support is needed, finance requires tools to find the businesses, from corner shops to high-growth startups that are each the best of Britain.