UK SMBs turn to credit amid economic uncertainty; here’s how they’re staying afloat

The UK economy is facing a tough time, with volatile month-on-month inflation and the Bank of England dismissing any prospect of cuts to interest rates

UK SMBs turn to credit amid economic uncertainty

These challenges are having a direct impact on the 5.5 million small and medium-sized businesses across the country. Recent revelations from the Intuit QuickBooks Small Business Index Annual Report 2023, highlighted a concerning trend: the reliance on credit – with over three-quarters of a million UK SMBs having turned to credit cards in the past year alone.

Thriving innovation

Small business in particular are working harder than ever to keep their businesses going in these uncertain times. In response, the report shows they are turning to innovative digital solutions, ranging from social media and ecommerce to sophisticated tools like AI and machine learning. They are also paying close attention to how they manage their finances with almost half already using cloud accounting software. The more of these tools they use, the more likely they are to be thriving. For instance, small businesses using eight or more digital tools are almost twice as likely to report revenue growth compared to those using two or fewer.

Clear cash flow management

One of the most important aspects of running a successful business is having a clear and accurate picture of your cash flow. Cash flow is the lifeblood of any business, and it can make or break your ability to pay your bills, invest in your growth, and weather any unexpected shocks. However, many SMBs struggle with cash flow management. Another insight from the report is that small businesses are increasingly resorting to credit cards or loans to fix cash flow problems. In September 2022, only 32% of SMBs reported using these options, a figure that rose to a concerning 51% by April 2023. This is one of many factors contributing to the fact that monthly credit card spending is currently 22% above pre-pandemic levels. The cost and availability of financing has also deteriorated, with 32% of participants citing challenges in the year leading up to April 2023. If small businesses don’t have good access to a variety of financing options, they will find it harder to grow.  

Despite a slowdown in inflation, prices continue to rise at a pace. The Bank’s prediction of zero economic growth until 2025 and the potential for further interest rate hikes, only adds to the challenges facing SMBs. For 47% of them, inflation remains the the top hurdle they face. 

Funding is critical

With credit cards emerging as a predominant source of funding, we need to explore the role than loans and lines of credit can also play. The report shows that just 12% of SMBs applied for these from May 2022 to April 2023. This matters because small businesses tell us they need funding for growth above all. Seed funding has also been crucial for 25% of small businesses in getting started, while 48% have dipped into their personal savings to fund their ventures. Young businesses have the most potential for growth and innovation and yet, they often find it hardest to get funding. 

Entrepreneurial spirit prevails

Despite the doom and gloom, it’s truly uplifting to see the continued entrepreneurial spirit among SMBs. In fact, more than a third are actively planning investments for future growth. This not only reflects a commitment to overcoming the current challenges but also a collective effort to fortify their businesses against future turbulence. This entrepreneurial drive is essential, not just for individual success stories but for the overall health of our economy.

Small and young businesses are vital contributors to job creation, innovation, and economic growth. While larger firms started as small businesses, the journey to continued success and profitability is fraught with challenges, and limited resources make them susceptible to macroeconomic fluctuations — as we’ve seen in the declining monthly job vacancy numbers in the Intuit QuickBooks Small Business Index

Growth in the face of economic headwinds

As the year draws to a close and the Self Assessment deadline approaches, everyone prioritises their financial management. But this shouldn’t be a once-a year priority. Taking the time to organise finances not only prepares businesses for the future but also unveils opportunities to reduce tax liabilities by identifying deductible expenses. By facing these challenges head-on and leveraging financial management tools, SMBs can position themselves for growth despite the prevailing economic headwinds.

Simon Worsfold
Simon Worsfold

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