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The vast majority of SME finance experts expect the Government to miss its target of halving inflation by the end of the year, iwoca’s latest Q2 2023 SME Expert Index finds.

The new research, carried out with over 100 SME finance brokers who collectively submitted nearly 1,000 loan applications in June, reveals that three quarters (75%) expect inflation to remain above 5.4% at the end of the year.

This would mean missing Prime Minister Rishi Sunak’s January target of halving inflation from 10.7% by the end of the year. While inflation fell to 6.8% in July, core inflation remained flat at 6.9% and projections suggest August could see rates rise again. Fewer than one in eight brokers see the 5.4% target as achievable by December.

Four in five (81%) experts in small business financing believe continued high costs over the next year will significantly reduce SMEs' ability to grow their business. This indicates that the Government’s other priority of growing the economy may also fall by the wayside if inflation is not curbed swiftly.

High street banks continue to cut lending to SMEs, despite demand increasing

Exacerbating SMEs’ concerns is the absence of support from traditional lenders. A tough lending environment for small businesses persists, as over four in five brokers (84%) say high street banks are reducing their appetite for funding SMEs. This has increased by 7 percentage points over the last three months.

A similar proportion (81%) predict demand for finance for SMEs will increase over the next 6 months, indicating that the funding gap for SMEs is set to widen.

Despite the expected increase in applications, brokers do not anticipate that the SME lending market will recover to pre-pandemic levels. Over a quarter (27%) of brokers predict that the demand for SME loans will not catch up to pre-pandemic levels for another 12 months – a record high proportion since January 2022.

SME recession fears return

While the UK economy narrowly avoided a technical recession in the beginning of the year, concerns are mounting that recession may still be around the corner.

The proportion of brokers who say their small business clients are ‘very concerned’ about the possibility of a recession has doubled since March to 20%. Seven in ten (71%) brokers say their small business clients are concerned overall about the possibility of a recession, up 8 percentage points from the previous quarter.

Colin Goldstein (pictured), Commercial Growth Director of iwoca, said: “Although the recent drop is welcome, the continued high rate of inflation is reducing small businesses’ ability to grow and invest, and brokers don’t have confidence that progress will be made by the end of the year.

“With high street banks continuing to pull back from SME lending, small businesses need attractive options for financing, or the significant growth potential that they offer the economy will be lost.”

James Robson, CEO of FundOnion, said “Inflation will likely increase in the second half of 2023 – albeit less than in H1 this year. SMEs are acutely aware of their rising costs and seeking ways to reduce their expenditure.

"We deal with a broad range of SMEs, who are consistent in their demand for debt finance to fuel their growth and alleviate cashflow issues. Recently, we've also seen a growing interest from SMEs in exploring new financial products that could ease cashflow concerns. Ultimately, however, term loans are proving particularly popular among business directors and managers, owing to their flexibility and familiarity.”

Vivek Singh, broker at Phoenix Commercial Finance, said: "The chances of inflation reducing significantly this year are bleak at best. With energy prices showing no sign of falling, SMEs are bracing for tough months ahead.

"Recession fears are real for the SME community, which is in survival mode. Short-term funding for cashflow issues is still a popular choice for finance as smaller businesses put growth on the backburner. Our SME clients are grappling with high costs, and scaled back government support, which is driving up the number of insolvencies in 2023."

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