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Peer2Peer Finance News | September 23, 2017

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How rising inflation will impact small businesses

How rising inflation will impact small businesses
Kathryn Gaw

Everybody knows that rising inflation means an increase in the cost of living. But not everyone realises that the effect on small- and medium-sized enterprises (SMEs) can be much more severe.

Earlier this week, it was announced that the Consumer Price Index (CPI) 12-month rate had risen to 2.9 per cent in May 2017, up from 2.7 per cent in April and well above the government’s target of two per cent. For the average consumer, this means that the price of food, utilities and clothing has just gone up, while their savings are worth a little bit less than they were before. For the UK’s estimated 5.4 million SMEs, it means higher bills and diminished buying power, as well as an increasingly uncertain long-term outlook.

Read more: SMEs feel the pinch as inflation soars

“The news will certainly put pressure on Britain’s small businesses,” Anil Stocker, chief executive of MarketInvoice told Peer2Peer Finance News. “Inflation is at its highest level since June 2013.

“Various monitors suggest that the operating costs, such as employment and utility bills, for UK businesses are hitting an all-time peak. This will stretch businesses even more. This coupled with Brexit negotiations and an uncertain pound could well signal more trouble ahead.”

Earlier this year, Barclays research found 59 per cent of the UK’s small businesses had not prepared for inflationary pressures. Yet in the year ending 31 March 2017, SME operating costs had risen by 3.2 per cent.

For many smaller businesses, 3.2 per cent is well above the margin for error, and if inflationary costs have not been factored into the annual budget, they can have a devastating effect on the books. According to Mike Cherry, the national chairman of the Federation of Small Businesses (FSB), these miscalculations have forced some small business owners to personally cover the costs.

“Operating costs for small firms are now at their highest in four years,” said the FSB’s Cherry. “Small business owners and their staff are having to personally absorb these hikes and have less and less room to invest for growth. Support is urgently needed.”

The FSB has called on the government to increase the employment allowance to £4,000 and freeze fuel duty and insurance premium tax as a way of offsetting the inflationary pressure. However, following the unexpected results of the snap election, it is not clear if or when these requests will be received.

For some SMEs, bridge financing and alternative funding can offer a lifeline in times of uncertainty, and more and more businesses are turning to asset-backed financing as a way of shoring up funds.

According to recent analysis by the Asset Based Finance Association (ABFA), an average of £9.5bn was lent to SMEs using either invoice finance or asset-based lending products in 2016, a three per cent increase on the previous year. At the same time, SME reliance on bank overdrafts fell by two per cent, suggesting that business owners are becoming more open to non-traditional financing options as their margins tighten.

This could lead to a surge of interest in SME-focused peer-to-peer lending, and many platforms are now actively targeting SME owners with attractive loan terms and competitive interest rates.

The National Institute of Economic and Social Research has predicted that inflation will rise as high as four per cent by the end of this year, putting even more pressure on business owners, and raising concerns about access to affordable funding.

However, not everyone is pessimistic about the future of inflation. Stuart Law, chief executive of Assetz Capital told Peer2Peer Finance News that he is not expecting inflation to continue at the current rate because “it’s principally based on the currency rates having driven up import prices temporarily”.

He added: “It’s doubtful that the Bank of England will act on this temporary inflation rise and so we expect rates to remain modest – it’s unlikely that this will affect the cost of funding for SMEs.”

Whatever the future holds, no small business owner can afford to be ambivalent about inflation rates, especially in these uncertain times.

Read more: The SME’s guide to P2P