What small businesses need to know about the economy

Small businesses will suffer a significant impact from the current economic crisis - but will they all be negative?

Due to the current economic crisis, lending to small businesses will be tighter, borrowing costs will rise, and imports could become more expensive.

As a result of Kwasi Kwarteng's mini Budget on September 23, borrowing costs are expected to rise.

A study by UKFinance, the banking trade body, estimates that small businesses borrowed £204bn in 2019, a significant increase from £167bn before Covid-19 struck. Many economists predict that interest rates will more than double next year, which would increase the cost of servicing about half of that debt.

In 2021, a survey by the British Business Bank found that about one-quarter of SMEs used bank loans and credit cards to finance their operations. Overdrafts were also used by one in seven people.

The Federation of Small Businesses (FSB) has expressed its concern that interest rate rises could “pile financial pressure on thousands of small businesses who are mired in debt.” This includes those with debt from emergency Covid loans and commercial mortgages, Craig Beaumont, the group’s chief of external affairs, said in The Times.

Miles Beale, head of the Wine and Spirit Trade Association, said: “While the headlines on Friday were meant to be about the laudable freeze to alcohol duty, the pound tanking against the dollar has both usurped them and delivered a significant blow for UK wine businesses and consumers.”

In this article, we examine four key areas of business and how they have been affected by the economic crisis and last week's mini Budget.

Loans

Small businesses are asking for loans as they navigate the cost of doing business crisis and lower customer demand. Approximately half of SMEs have variable-rate loans that rise in price as interest rates rise.

According to UK Finance, new lending to SMEs was stable in the first half of 2022. While businesses used overdrafts more than a year ago and deposits declined, they still had financial security from Covid's emergency support system.

SME lending specialist, Andy Holgate, said: “A big part of SME lending is affordability and they are already under a mountain of debt. As that debt matures and needs refinancing, it will become more expensive and harder for them to service. The banks will not offer them the same level of debt. I expect this will lead to a larger number of insolvencies in the next 18 months.”

Kate Nicholls, head of lobby group UKHospitality, told the Financial Times that her members owed about £12bn and that the prospect of rising interest rates would leave many pubs, restaurants and hotels vulnerable as they had come out of the pandemic with higher borrowing than other parts of the economy.

UKHospitality members trying to arrange new loans were reporting being offered rates of more than 10 per cent. “Many cannot really raise finance at that rate,” she said.

Imports

It is estimated that the UK economy imports more than it exports, as noted by the House of Commons Library. In 2021, the UK’s exports of goods and services totalled £625bn and imports totalled £654bn. This means that the UK runs at a trade deficit. In addition, a weaker pound makes imports more expensive and small firms' money won't go as far. This may result in price increases for customers and a loss of market share.

Kate Nicholls, chief executive of UKHospitality, noted that 60 per cent of the sector’s food and drink produce was imported and was also affected by commodities prices in euros or dollars. “So, for example, milk is sold and priced on global markets in euros and coffee in dollars. Even though we are self-sufficient in milk, the price is still affected by currency. This will be the case for lots of homegrown goods,” she said.

If the pound weakens further, problems will only intensify. Mark Robinson, managing director of Albion Forest Mortgages, said: “The pound has fallen almost as low as the confidence in the current leadership. If this leads to more base rate rises it could be disastrous for all of us. Last week, I called the Government short-sighted, but they must be getting cataract surgery this week to not see this coming. The dollar equalling the pound is unheard of in my lifetime with its lowest value in nearly 40 years.”

Tax simplification and IR35

Tax simplification and reversing IR35 sound good on paper. The transition, however, could be problematic without guidance from the OBR and the Office of Tax Simplification.

Glenn Collins, head of ACCA UK, told Small Business: “Independent fiscal institutions, like the OBR, are critical in managing public finances and the dissolution of the Office of Tax Simplification is particularly worrying without an understanding of how this will pan out in years to come. The OTS previously worked with holding agencies and provided guidance on previous tax reforms and regulations. Without the OTS and with further details needed on how the Government will simplify tax many UK SMEs will still be facing a complicated and unclear tax system.” 

Corporation Tax/rate cut

It sounds good to scrap the planned rise in Corporation Tax, but will it benefit small businesses?

Collins continued: “The government’s decision to keep Corporation Tax at 19 per cent will, however, encourage businesses to invest. With the main rate of Corporation tax previously set to increase to 25 per cent next April many businesses were becoming more nervous already feeling the strain of a rise in inflation, cost of living and energy prices putting unnecessary pressure on businesses.

“Now more than ever businesses are looking at the ease of doing business and where investment opportunities lie.”