How are businesses strengthening resilience and planning for the future?

The gradual easing of inflation in 2024 is good news for businesses in the UK and Republic of Ireland. However, the broader business landscape is still some way from being rosy. The Autumn Budget put new pressure on businesses, with higher tax, increasing business rates and wage burdens that could particularly impact sectors like hospitality and retail.

Increasing geopolitical risk remains a threat to the stabilisation of supply chain, continuing to drag on business growth, with reduced production capacity and labour shortages among the leading causes. To adapt, many businesses face the associated costs of sourcing alternative suppliers and production facilities. Interest rates have only dropped half a percentage point, meaning taking on the debt needed to foot these costs is an unattractive option. All of this comes while firms face continually depressed consumer confidence and retention, compounded by proposed tariffs from the US that could narrow customer bases.

It’s little surprise then that according to our research based on surveys and interviews with hundreds of business leaders and lenders, resilience remains a key priority. In fact, in our SME Affordability Report 2024, conducted in the summer of that year, respondents confirmed that energy costs (74%) and supply chain issues (66%) remain the two biggest long-term issues facing the economy. It’s worth noting that subsequent changes from the Autumn budget could well now take greater consideration. However, while long-term concerns remain, our findings show that 59% of small businesses feel more optimistic about the economy than a year ago. Moreover, 63% of small businesses expect to be at least as profitable, if not more, than last year – a stark difference from our findings in last year’s report where 51% of businesses expected reduced profits or outright losses.

Green shoots?

These findings point to a tentative – but growing – sense of positivity for small businesses, whose resilience strategies are beginning to bear fruit. Pushed onto the backfoot by the cost-of-living crisis and inflationary surge, many small and medium enterprises (SMEs) turned to credit to keep themselves afloat. Yet here too, the reasons for accessing credit in 2024 hint at a changing mood among businesses.

The SME Affordability Survey in 2023 found that the three leading reasons for borrowing were improving cash flow (52%), creating a safety net (32%) and retaining members of staff (29%). However, in 2024 the leading reason for accessing credit was funding business expansion (48%) with improving cash flow bumped into second place (44%).

While 98% of SMEs plan to further improve their resilience this year, there are growing signs that businesses are positioning themselves for growth having weathered an initial period of hardship.

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Safer lending for a stronger recovery

The strengthening of business resilience in 2024 has been driven by multiple factors, including diversification of portfolios and supply chains, recruiting the right people and retaining them through upskilling and flexible working arrangements, keeping prices low and manging lower profit margins. As a result, in Q3 2024 demand for lending was up on average around 20% with service sectors in particular posting strong growth. Commercial lending has also shown a significant increase in activity, with business loans and mortgages achieving year-on-year growth of 34% and 59% respectively.

The vast majority (84%) of lenders themselves have seen demand for credit grow (38%) or remain stable (46%) in 2024. And looking ahead, 47% anticipate even greater demand from SMEs over the next 12 to 18 months, suggesting that lending will continue to be an important method of adaptation in the coming months.

That said, with SMEs bolstering their resilience through a range of strategies, lenders are in turn exercising greater caution to ensure they are lending safely. Although only one in five has recorded a rise in loan delinquency, 94% think that the risk of lending to SMEs has increased. It’s for this reason that nearly half (46%) of lenders we surveyed are stepping up their affordability reviews.

Far from being seen negatively though, the overwhelming majority of SMEs (67%) welcome increased scrutiny and agree that more checks are as much about protecting them as lenders.

In fact, the shared acceptance for stronger customer data has grown since our 2023 Affordability Report, with both SMEs and lenders aligning on its benefits. While last year only 40% of SMEs believed better customer data could help them withstand future challenges, this year’s report found this figure has rocketed to 92%.

Lenders also recognise that deeper and more informed data could enable them to make smarter decisions. Our findings suggest 78% of lenders say they need current affordability criteria to be of better quality and depth to allow them to make lending decisions faster and with more accuracy. But only 42% of lenders say they have so far invested in the solutions necessary to carry out more data checks.

From adapting to thriving

Lenders have played a pivotal part in helping SMEs adapt to the headwinds of recent years. And while resilience will continue to define business activity until interest and inflation fall further, SMEs are already looking to position themselves to capitalise on future growth. Here too, lenders can make a difference – but having already extended credit to help many SMEs adapt to tricky market conditions, they need to exercise caution.