Research from ACCA UK and The CFN reveals worrying financial trends from UK SMEs as optimism drops in the approach to 2022.

Analysis from ACCA UK (the Association of Chartered Certified Accountants) and The Corporate Finance Network (The CFN) uncovers UK SMEs are not receiving the support or financing they need to recover from the pandemic, leading to worrying financial trends such as a reliance on short-term financing like business overdrafts.

The data from the latest edition of the ACCA UK and CFN SME Recovery Tracker reveals that accountants believe that more than 1 in 4 (27%) businesses have still not returned to pre-covid levels of productivity or turnover. When looking to the future a huge 4 in 5 UK SMEs are not seeking finance to grow in the next six to 12 months.

There are further indicators of UK SME stagnation as respondents report that there has been a 7% drop month-on-month in their business clients looking to hire new talent (22% in November 2021 Vs 15.2% in December 2021) and over a 4% increase in those expecting to make redundancies next year, now with over 1 in 10 businesses expecting to make personnel cuts (8% in November 2021 Vs 12.4% in December 2021).

Worryingly, as the UK heads into another period of increased COVID-19 restrictions over the New Year, the data reveals the small business economy is taking another hit to business security and stability. Over the last month alone, there has been close to a 10% drop in the number of businesses that are expected to still be trading in 12 months time – from 93% in November to 83.8% in December 2021.

As well as this, a third (30%) of accountant practitioners responding from around the UK anticipate their clients will need to use their overdraft facility in the next six months. This short-term finance is in contrast to the calls on government for longer-term support from the small business community, particularly if there is another lockdown on the cards in the New Year as a result of the Omicron variant. A further third (30%) expect their clients to apply for secured or unsecured business loans within the same time period and nearly half (45%) expect clients to apply for eligible business grants, demonstrating that it is becoming a more difficult environment in which to do business.

In an effort to stabilise their internal working capital position over the past 12 months, over 1 in 5 (21.4%) UK SMEs have increased credit checks for potential customers and 30.7% have put tighter payment terms in place.

Claire Bennison, Head of ACCA UK, commented on the findings: ‘I’m extremely apprehensive about the trends this data has revealed on the state of UK SMEs. Not only for the businesses themselves, but these continuing financial issues are resulting in long-term damaging impacts on the wider UK economy. Our research revealed that financial restrictions are the number one reason holding businesses back from putting a sustainability strategy in place, while a whopping 30% of accountants believe their clients still have low levels of digital readiness.

‘Without the right financial support for the SME economy, the UK as a whole is not going to move forward in becoming a leader in innovation – either in technology or sustainability – and that is a concern.’

Kirsty McGregor, founder of The Corporate Finance Network, adds: ‘Looking ahead, there are some major impacts coming in the new year, including business rates increases, an uplift in the national minimum wage, and the new health and social care levy introduction in April adding up to 2.5% to payroll costs, all of which will have a further negative impact on these struggling SMEs. As we head into another period of increased COVID-19 restrictions, I am concerned about the future of the UK SME economy and call on the Government to review their policies to provide longer-term support until this period of uncertainty is over.’

In Wales, over 4 in 5 (82.4%) of clients have returned to pre-COVID levels of productivity or turnover – 10% higher than the UK average of 72.9%. However, half of Welsh clients are expected to use their overdraft facility in the next 6-12 months – a huge 20% higher than the UK average.

For those with clients in Scotland, the picture is slightly less gloomy, with a larger number expected to still be in business in the next 12 months (92%) compared to the national average, though this still leaves a considerable number at risk. Scottish businesses are also half as likely to use their overdraft facilities as the national average, and do not anticipate needing any business loans in the coming six months.

As Britain moves to ‘Build Back Better’, it’s clear that there needs to be an increased focus on the UK’s SME economy and in particular more financial support for those still struggling with the effects of the pandemic. Small businesses are vital to how well the UK will bounce back and its productivity in the long-term and government initiatives need to reflect this.

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