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Analysis & opinionAugust 5 2021

Surviving post-pandemic support: what next for SMEs?

Banks should take sympathetic and positive approach when considering an SME client’s financial position.
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Surviving post-pandemic support: what next for SMEs?
emma lovell

The worst of the global pandemic may be past, but the pain for small and medium-sized enterprises (SMEs) is far from over. The UK government’s Covid-19 assistance schemes are winding down, yet SMEs remain vulnerable. Support will be vital to help them through this tricky transition phase and nurture ‘UK plc’ as a whole back to health — and financial service providers must be at the heart of it.

SMEs are the backbone of the economy, accounting for 99.9% of the 6 million private sector businesses in the UK. Some three-fifths of the working population (16.8 million people) are employed by a small business, while their turnover makes up more than half the private-sector total. As a recent Bank of England working paper observes, a healthy SME sector is vital for the sustained growth of the UK economy, as well as the resilience of the financial sector.

Hardest hit

Covid-19 and the subsequent programme of public health interventions have hit the SME sector harder than larger businesses.

Gross domestic product was 10% lower in 2020 than the year before, the largest annual fall in around 300 years. Lower demand for goods and services, along with disruptions to production and supply chains, provoked a sharp and persistent decline in revenues for many businesses. Cashflows have come under pressure in turn, increasing liquidity needs.

Processes need to be in place to identify SME customers who may be in financial difficulty

Between April and December 2020, the average UK SME suffered a 30-percentage point slump in turnover growth, relative to the pre-pandemic period. The significant dispersion across firms means many endured an even bigger drop.

The gradual reopening of the economy is alleviating some of the strain, with the percentage of businesses experiencing a decline in turnover compared to the norm falling to 30% by early June 2021. However, even this recovery is patchy.

In the arts, entertainment and recreation industry, 63% of businesses reported lower turnovers. More than half of businesses in the accommodation and food services sector continue to see a decline.

Ending government support

Thanks to the government’s multi-pronged response, SMEs have, for the most part, been able to reduce costs by as much as turnover through the crisis, resulting in a relatively small cashflow impact for the average company. Even so, the fallout is growing.

More than 720,000 businesses were in significant financial distress by the end of the first quarter of 2021 — a 15% increase from the previous quarter and 42% year-on-year rise. All 22 sectors analysed by insolvency specialist Begbies Traynor’s research saw an upturn in financial distress, indicating a broad and deteriorating situation.

The big question is: what will happen now that government support is being withdrawn?

Deferred VAT payments needed to be made by June 30. Business rate exemptions for children’s nurseries and properties in the retail, hospitality and leisure sectors ended on the same day, with the relief reduced to 66% until March 2022, subject to a cash cap. Repayments to the Bounce Back Loan Scheme — which is aimed at smaller businesses and accounted for £45bn of the £80bn in net additional finance UK businesses raised in 2020 — are coming due.

The furlough scheme, which has been instrumental in protecting millions of jobs, will be tapered through the summer. From July 1, the government cut its contribution from 80% of wages to 70%, with employers paying the difference. In August and September, the government will pay just 60%. The scheme is due to close at the end of September.

Ongoing financial support is vital

Higher costs are coming at a time when the economic recovery remains uncertain and cash at many companies is tight, with Office for National Statistics figures showing that a quarter of businesses have cash reserves of just three months or less. In this environment, the widespread business failures averted by the government’s Covid-19 support packages could quickly become reality.

Ongoing access to finance, along with information, tools and guidance, will be crucial to secure many SMEs’ survival and put them on the path back to growth.

Banks, fintechs and other financial service providers can help by continuing to take a sympathetic and positive approach when considering a customer’s financial position. That starts by ensuring processes are in place to identify customers who may be in financial difficulty. They can then act promptly to address the situation by giving customers the breathing space and support to turn their businesses around where there is a realistic possibility of doing so. Clear information setting out the support available, the next steps and any action the customer needs to take will go a long way in easing the pressure on SMEs and ensuring they have the best chance of getting back on a secure footing.

This is not a question of charity or moral responsibility. It is about sound, long-term business practice. SMEs are a vital part of the UK’s economic, social and financial ecosystem, and financial service providers can play a decisive role in ensuring that ecosystem remains healthy and vibrant.

Emma Lovell is chief executive of the Lending Standards Board, a self-regulatory body for the UK banking and lending industry.

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Read more about:  Analysis & opinion , Western Europe , UK