Many UK businesses have struggled to keep their heads above water since the removal of COVID-19 support measures coupled with the cost-of-living crisis and rising inflation. David Brown, Founder and CEO of fintech, Hi Group, believes more businesses should embrace alternative finance to unlock cashflow in 2023.
This year has been tough for businesses, particularly medium and small enterprises. The combined threat of soaring costs and weakening demand against the backdrop of a volatile economic environment has presented real challenges.
As the economic outlook worsened, banks have increasingly tightened lending requirements. According to the Small Business Index, the success of firms’ credit applications remained at 44.3% – well below the pre-pandemic trend.
In times of uncertainty, businesses which need funding are unable to match the traditional banking system’s more inflexible and strict affordability tests, leaving many unable to access finance.
However, fintechs are increasingly filling the gap left by banks by providing additional financial levers for businesses. In 2023, we should expect to see more businesses tapping into the UK’s fintech sector to access alternative finance schemes to boost their working capital and release pressure on their cashflows.
The challenge ahead
During the Covid-19 pandemic, the government introduced special measures to temporarily keep many UK firms afloat. Since the furlough scheme and the suspension of wrongful trading liability have been removed, businesses have been left to face the reality of their financial situation post-pandemic.
Economic uncertainty is likely to worsen in 2023. According to CBI, the economy is on course to shrink 0.4% next year as inflation is expected to remain high and companies are likely to pause investment. This will mean the banks’ reluctance to lend will continue.
Some businesses may not be able to cope with increased costs in this inflationary environment and may opt to enter insolvency. Some have already done so, with the second quarter of 2022 seeing the highest quarterly level of total company insolvencies in England and Wales since 2009.
Others have turned to supply chain finance (SCF), a form of financial transaction whereby a third party facilitates an exchange by financing the supplier on the customer’s behalf, has become popular since the pandemic. However, it has issues with scalability down to small suppliers. Most small suppliers struggle to access SCF programmes because providers can’t justify paying the host of checks required including know-your-customer and anti-money laundering checks.
The few suppliers that are large enough to be on-boarded by the SCF provider will still have payment significantly delayed because a supplier’s work doesn’t start the day an invoice is issued.
Businesses are being let down by traditional finance and need to explore alternative finance providers to help them stay afloat during these challenging times.
Fintechs have spotted the opportunity to fill the funding gaps left by traditional banks and are offering alternative finance options for SMEs.
One way they are doing this is through financing payroll. Payroll financing, also known as Pay Asset Finance (PAF), is a process in which an employer’s payroll is processed so a funder can finance it.
Businesses can finance payroll for months and release capital back into the company, boosting cashflow by funding what is often their highest expense. This money is then made freely available to the employee as they earn it, smoothing their cashflow by eradicating the feast or famine cycle of monthly play.
Employees can decide when they want to access their pay, helping to increase financial freedom, flexibility and wellbeing. The cost-of-living crisis is likely to continue well into 2023 and employees’ financial wellbeing will become an even bigger concern.
Market research shows that more frequent pay improves attendance, retention and performance. By offering flexible pay, employers are likely to see other benefits such as attracting better talent, improving wellbeing and productivity, and reducing absenteeism.
It is estimated that PAF would make $20.3 trillion available in OECD countries, vital cashflow at a time when businesses are struggling to pay their bills and manage rising debt.
In 2023, fintechs are likely to continue filling the gap left by banks by providing alternative financial levers to businesses. UK businesses need to look beyond traditional financing methods to access necessary finance and ensure their survival through this cost-of-living crisis.