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August 31, 2021

Surviving post-pandemic support: bank’s crucial role to ensure SMEs prosper

By Mohamed Dabo

Covid-19 remains a virulent threat, yet the UK government support that sustained many SMEs through the crisis will soon come to an end, writes Emma Lovell

The health of the country’s SMEs sector now rests with the private sector in general and the financial services sector in particular. The worst may be past, but the pain for SMEs is far from over. The UK government’s Covid assistance schemes are winding down, yet SMEs remain vulnerable – especially if the uptick in average daily coronavirus cases further delays a full return to business as usual.

Support will be vital to help SMEs through this tricky transition phase and nurture UK plc as a whole back to health … and financial service providers must be at the heart of it.

SMEs are the backbone of the economy, accounting for 99.9% of the 6 million private sector businesses in the UK. Three-fifths of the working population (16.8 million people) are employed by a small business, while their turnover makes up more than half the private sector total.

As a recent Bank of England working paper observes, a healthy SME sector is vital for the sustained growth of the UK economy, as well as the resilience of the financial sector.

SMEs hit hardest by the pandemic

SMEs have been severely weakened by Covid-19 and the programme of public health interventions, which have hit the sector harder than larger businesses.

GDP was 10% lower in 2020 than the year before, the largest annual fall in around 300 years.

Lower demand for goods and services, along with disruptions to production and supply chains, provoked a sharp and persistent decline in revenues for many businesses. Cashflows have come under pressure in turn, increasing liquidity needs.

Between April and December 2020, the average UK SME suffered a 30 percentage point slump in turnover growth relative to the period before the crisis. The significant dispersion across firms means many endured an even bigger drop.

The gradual reopening of the economy is alleviating some of the strain, with the percentage of businesses experiencing a decline in turnover compared to the norm falling to 30% by early June 2021. But the recovery is patchy.

In the arts, entertainment and recreation industry, 63% of businesses reported lower turnovers. More than half of businesses in the accommodation and food services sector continue to see a decline. The arts, entertainment and recreation industry also reported the highest proportion of its workforce still on furlough (18%), followed by the other service activities industry.

The end of government support 

Thanks to the government’s multi-pronged response, for the most part SMEs have been able to reduce costs by as much as turnover through the crisis, resulting in a relatively small cashflow impact for the average SME. Even so the fallout is growing.

More than 720,000 businesses were in significant financial distress by the end of Q1 2021, a 15% increase from the previous quarter and 42% year-on-year rise.

All 22 sectors analysed by insolvency specialist Begbies Traynor’s research saw an upturn in financial distress, indicating a broad and deteriorating situation.

The big question is what will happen now government support is being withdrawn?

Deferred VAT payments needed to be made by 30 June. Business rate exemptions for children’s nurseries and properties in the retail, hospitality and leisure sectors ended on 30 June, with the relief reduced to 66% until March 2022, subject to a cash cap.

Repayments to the Bounce Back Loan Scheme – which is aimed at smaller businesses and accounted for £45bn of the £80bn in net additional finance UK businesses raised in 2020 – are coming due.

The furlough scheme, pivotal in protecting millions of jobs, will be tapered through the summer. From 1 July, the Government cut its contribution from 80% to 70% of wages, with employers paying the 10% difference. In August and September, the government will pay 60% and employers 20%. The scheme is due to close at the end of September.

Ongoing financial support is urgent 

Higher costs are coming at a time when the economic recovery remains uncertain and cash at many companies is tight, with Office for National Statistic figures showing a quarter of businesses have cash reserves of just three months or less.

In this environment, the widespread business failures averted by the government’s Covid-19 support packages could quickly become reality.

Ongoing access to finance, along with information, tools and guidance will be crucial to secure many SMEs’ survival and put them on the path back to growth.

Crucial role ahead for banks, fintechs

Banks, fintechs and other financial service providers can help by continuing to take a sympathetic and positive approach when considering a customer’s financial position. That starts by ensuring processes are in place to identify customers who may be in financial difficulty.

They can then act promptly to address the situation by giving customers the breathing space and support to turn their businesses around where there is a realistic possibility of doing so. Clear information setting out the support available, the next steps and any action the customer needs to take, will go a long way in easing the pressure on SMEs and ensuring they have the best chance of getting back on a secure footing.

This is not a question of charity or moral responsibility. It is about sound, long-term business practice. SMEs are a vital part of our country’s economic, social and financial ecosystem and financial service providers can play a decisive role in ensuring that ecosystem remains healthy and vibrant.

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