Small firms still hammered by inflation, says FSB

Small businesses will be hoping that yesterdays interest rate rise will mark an end to an ongoing trend that saw the Bank of England increase its base rate from 4.25% to 4.5%, It was the 12th successive increase since 2021 and the highest simce 2008.

But the Federation of Small Businesses’s National Chair Martin McTague said that most firms will “once again” be hoping that yesterday’s rise represents an apex.

“Further rate increases past this latest one will risk entrenching the economic damage to small firms, severely curtailing their ability to invest and grow. We cannot end up in a situation where the cure is adding to the harms caused by the disease,” he said.

“Getting the rate of price rises under control is vitally important for small firms, but they could be forgiven for asking if the blunt weapon of base rate increases is effective, given that they are still very much feeling the effects of higher prices at the same time.

“Recent remarks on inflation by senior members of the Bank of England team have reinforced small businesses’ fears that the Bank is out of touch with the reality of running a small firm in the UK. With rate rises dampening consumer demand and making many business debts more expensive, small firms are absolutely up against it, while Government energy support has fallen away, leaving many exposed to spiralling utility bills.”

While overall, small firms’ confidence bounced back compared to the end of last year, it’s still not in positive territory

The UK’s economic ecosystem needs small businesses to invest in order to grow and thrive, he added, which means they need access to affordable credit.

He said: “Our Small Business Index research found that small firms’ view of the affordability and availability of credit hit its lowest ever level in the first quarter, while the interest rates on loans have surged. While overall, small firms’ confidence bounced back compared to the end of last year, it’s still not in positive territory, and a record proportion of small businesses said their costs were higher than in the same quarter last year.

“Policies to help small businesses to invest and prosper seem thin on the ground. To address this, the Prudential Regulation Authority must cancel its plans to remove the SME supporting factor, which makes lending to small businesses less capital-intensive for banks; its loss would only make the lending situation more difficult for small businesses. The Government tackling late payment to free up cash for small firms in supply chains would also be a huge help – the value of wrongfully withheld payments is eroded for every day that funds are not released to supply chains.”

Tommaso Aquilante, Associate Director of Economic Research at Dun & Bradstreet, put it this way: “While the UK economy has proven more resilient than expected, inflation is far from tamed. And with both wage and core inflation now at around 6%, the Bank of England is legitimately worried about a wage price spiral.

Daniel Pell headshot

Pell: finance leaders need data to plan for multiple scenarios

“By ensuring price stability, the Bank of England plays a crucial role in the economic system, allowing households and businesses to plan their spending and investments more predictably. Bringing inflation down is the priority.

“Yet, even if inflation eased and did not increase further, this year will likely remain tough and data shows that a quarter of business leaders cite weakening consumer demand as the most significant threat. Having a defence strategy here is critical and businesses need to have the knowledge and tools in their armoury to make well informed decisions to remain resilient but also competitive so that they can find innovative ways to serve customers when demand is lower and costs are higher.”

Douglas Grant, Group CEO at Manx Financial Group PLC, agreed that the rise was “yet another blow to businesses struggling to manoeuvre as cashflows are squeezed”.

And he predicted: “Stubbornly high inflation and flatlining GDP data highlighted sluggishness that may be difficult to shake off. Indeed, coupled with the global banking sector showing signs of weakness, SMEs must take this as yet another reminder to review their existing lending structures and ensure they are prepared for further challenges.

Many SMEs prepared for these hikes by listening to lenders and locking in their debt into fixed rate structures, but other businesses that were not as forward-thinking face significant uncertainty.”

And Daniel Pell, country manager UKI, at Workday said: “Finance leaders will undoubtedly worry about how this will impact their bottom line. The cost of debt will increase, putting pressure on outgoings at a time when consumers are also being forced to tighten their belts, exacerbating the problem, and ultimately impacting the country’s GDP.

During economic turbulence, it often falls on CFOs to steer the business through ongoing challenges and ensure financial resilience. While it’s impossible to predict the future, finance leaders can use data to plan for multiple scenarios. These plans must be done on a continual basis using financial planning and analysis (FP&A) tools, utilising data from across the business which isn’t limited to the finance team.

“Understanding data such as customer metric and employee sentiment, layered on top of financial information, gives finance and business leaders a holistic viewpoint so that they can best understand the health of the business, and prepare themselves for any further economic shocks.”

lan Thomas, UK CEO at the small business insurer Simply Business, said the rise “will serve as yet another blow for UK small businesses in what is already a difficult time. Between Brexit, two general elections and a global pandemic, the past five years have been a particularly difficult time for small business owners. In 2020, there were six million SMEs in the UK – 6.6% more than there are at the moment.”

And Mike Randall, CEO at Simply Asset Finance, said it was a stark reminder that we’re not out of the woods of high inflation yet,” adding: “While March’s drop in inflation shows signs of the Bank of England’s tightening cycle beginning to bear fruit, we cannot dismiss the fact that businesses are still faced with the highest rates of inflation and interest combined, which continue to hamper their growth”.


Rate rise: What the experts say