What will be the pain points for SME owners over the next 12 months?

SME owners have faced a challenging set of circumstances in recent years, with the UK’s exit from the European Union and the global pandemic causing unprecedented trading problems.

Unfortunately, adverse operational and financial issues are likely to increase over the next 12 months, and a range of significant pain points could create severe instability for some SMEs.

So what are the issues that SME owners need to address in the coming year?

Energy emergency

The Russian invasion of Ukraine has triggered an energy crisis, and given rise to soaring costs for UK businesses. Although the government recently announced the Energy Bill Relief Scheme for non-domestic users, the costs remain far higher than in recent years.

Businesses operating in energy intensive industries in particular, such as hospitality and manufacturing, could face significant cash flow pressures in spite of the government intervention.

Rising inflation

The British Chambers of Commerce (BCC) have predicted that Consumer Price Index inflation will rise to 14 per cent in the fourth quarter of 2022 – a steep increase on their previous prediction of 10 per cent.

If this alarming forecast comes to fruition SMEs will be directly affected, but inflation also impacts their customers’ ability to purchase amidst the soaring cost of living. The erosion of purchasing power can be significant once inflation takes hold. Staff retention may also suffer if wage demands increase.

Increasing interest rates

Higher interest rates, which have been set by the Bank of England to control inflation, may leave businesses unable to obtain vital finance. Small start-up businesses, in particular, rely on external funding to grow, and could fail due to the higher costs.

Servicing existing borrowing may also be a significant pain point for SME owners over the coming months. Those with variable rate commercial loans face severe cash flow issues, and difficulty in meeting their overall business objectives.

Fall in the value of sterling

A longstanding weakened pound means importers face higher costs in bringing supplies and raw materials to the UK. The recent and significant devaluation of sterling against the US dollar could also render SME importers unable to continue due to the sheer escalation in prices. Furthermore, if the supplier operates in an energy intensive industry, materials may already have risen in price due to the supplier’s own increased costs.  

Lingering effects of the pandemic

Post-Covid hesitancy among the general public may present an ongoing issue over the next 12 months, with sectors such as hospitality and retail at particular risk. For example, some people may prefer not to gather in busy shops, restaurants, or bars, for fear of infection.

SME owners may also still be struggling to adopt hybrid-working patterns for their staff, or to make the new arrangements effective. The ever-present risk of new Covid variants also requires thought by SME owners, so their businesses aren’t as negatively affected as at the height of the pandemic.

Creditor pressure

HMRC provided vital support and understanding for SMEs during the pandemic. The tax body are now returning to their pre-Covid approach, however, with less tolerance for late payments and non-payment.

Taking their more customary hard line attitude poses a significant threat for businesses experiencing financial decline, and that genuinely cannot afford to keep up with their tax liabilities.

Commercial landlords

In a similar manner, commercial landlords are becoming less tolerant of rent arrears. Following the pandemic, some landlords offered a financial ‘breathing space’ to SME tenants in financial difficulty.

This spirit of generosity is now diminishing, as commercial landlords seek to recover rent arrears quickly. It leaves SMEs that once had pandemic related legal protection from eviction, in danger of losing their premises.

The nature and volume of these challenges mean SME owners face a problematic 12 months ahead. Businesses unable to absorb the extra costs, or pass them onto their customers, could quickly flounder under the weight of external pressures and the unsustainable trading environment in which they find themselves.

In any period of business distress or financial uncertainty, we would always advocate taking early advice which could help businesses to obtain the widest suite of options available to them. Over time, if the financial situation worsens and a company becomes insolvent, these options diminish – so consider a free consultation at the earliest opportunity.

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