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SME Finance Experts Expect UK Government to Miss Inflation Target for 2023
According to iwoca’s latest Q2 2023 SME Expert Index, the majority of SME finance experts believe that the UK government will fail to achieve its target of halving inflation by the end of the year. The research, conducted with over one hundred SME finance brokers who collectively submitted nearly 1,000 loan applications in June, reveals that 75% of experts anticipate inflation to remain above 5.4% by the end of the year.
This forecast indicates that Prime Minister Rishi Sunak’s goal of halving inflation from 10.7% by year-end might not be achieved. Although inflation decreased to 6.8% in July, core inflation remained stagnant at 6.9%, and projections suggest that rates could rise again in August. Less than one in eight brokers view the 5.4% inflation target as attainable by December.
Furthermore, 81% of small business financing experts believe that sustained high costs over the next year will significantly impede SMEs’ ability to grow their businesses. This suggests that the government’s objective of stimulating economic growth might also be hindered if inflation is not swiftly curtailed.
Traditional lenders on the high street are exacerbating SMEs’ concerns by cutting back on lending, despite increased demand. Over four in five brokers (84%) report that high street banks are reducing their appetite for funding SMEs, which marks a 7-percentage point increase in the last three months. A comparable proportion (81%) predicts that demand for SME finance will rise in the next six months, indicating that the funding gap for SMEs is likely to widen.
While there is an expected surge in loan applications, brokers anticipate that the SME lending market will not recover to pre-pandemic levels. 27% of brokers predict that it will take another 12 months for demand for SME loans to catch up, the highest proportion since January 2022.
Concerns are also mounting that the UK economy may be heading towards a recession. The number of brokers who say that their small business clients are “very concerned” about the possibility of a recession has doubled since March to 20%. Additionally, 71% of brokers report that their small business clients are overall concerned about the prospect of a recession, up by 8 percentage points from the previous quarter.
Colin Goldstein, Commercial Growth Director of iwoca, expressed concern about the impact of high inflation on small businesses’ growth and investment. He highlighted that without attractive financing options, small businesses will struggle to realize their significant growth potential, especially with high street banks pulling back from SME lending.
Other experts in the field also weighed in on the situation. James Robson, CEO of FundOnion, predicts an increase in inflation in the second half of 2023, although it may be less severe than in the first half of the year. Robson emphasizes that SMEs are aware of rising costs and are actively seeking ways to reduce expenditure, including exploring new financial products to alleviate cash flow concerns. However, term loans remain popular among business directors and managers due to their flexibility and familiarity.
Vivek Singh, a broker at Phoenix Commercial Finance, echoed the concerns expressed by his peers. He emphasized the importance of finding solutions to address rising inflation and high costs, as they are hindering the growth and development of SMEs.
In conclusion, the latest data from iwoca’s SME Expert Index indicates that the UK government is expected to miss its inflation target for 2023. SME finance experts highlight concerns about the impact of high inflation on small businesses’ ability to grow and the reduced appetite for lending from traditional lenders. The prognosis for the SME lending market’s recovery to pre-pandemic levels is also bleak, while worries about a potential recession are on the rise.
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