Bridging & Commercial Supplement — SME Market Outlook by Allica Bank

2023 SME Market Outlook

in association with

I’M DELIGHTED TO ONCE AGAIN SHARE ALLICA BANK’S SME MARKET OUTLOOK EXCLUSIVELY IN BRIDGING & COMMERCIAL MAGAZINE

Using the insights gathered from over 150 established business owners—with an employee headcount between 10 and 100—we’ve gauged the attitudes of this vital segment of the UK economy towards the outlook for 2023.

We’ve backed this up with the opinions of over 220 of Allica’s commercial mortgage broker partners gathered in our broker survey from Q4 2022.

Unsurprisingly, there is a real concern in the market about business prospects this year and where challenges might arise. A combination of rising energy prices, inflation and interest rates have led to many growth plans being delayed, as businesses explore how they can firm up their bottom line.

However, the results also indicate that the resilience and steadfast creativity many businesses showed during the pandemic remains. There is a genuine optimism that better times lie ahead and a real appetite for opportunity.

2023 is going to be a challenging year, there’s no doubt about that. However, I’m certain that if banks, brokers and businesses continue to work together to secure those opportunities, we’ll come out on top.

I encourage you to read on for a little insight into how.

By Nick Baker Chief Commercial Officer at Allica Bank

2023 SME MARKET OUTLOOK

It looks like 2023 will be a tough year for the UK, with the Bank of England pointing to at least a year-long recession.

Inflationary shocks caused by the coronavirus pandemic and the war in Ukraine are already resulting in some difficult decisions being made by the UK’s established SMEs (businesses employing between 10 and 250 people).

This is a critical segment of the economy, which accounts for 30% of UK jobs and turnover, and is the driving force of innovation and growth in Britain. It’s vital, therefore, that banks and brokers are doing all they can to support them.

To help us and our broker community understand how we can contribute, Allica Bank conducted a survey of 150 established SME owners to gauge what these businesses are concerned about as we look ahead to a potential recession, and what this could mean for their growth and funding plans this year.

OUTLOOK FOR 2023

To begin, we wanted to understand how SME owners assessed their current business health. The response was surprisingly positive.

Nearly half of respondents in our survey told us that their business is currently ‘very healthy’, with a further 41% saying ’slightly healthy’. It’s a strong starting position.

However, as we look further ahead into 2023, businesses are much less confident. When asked about whether their business plans for the year will be affected to some degree by the potential recession (without any government support), a significant majority said yes.

Around 55% said that their plans for 2023 will be ‘significantly affected’—with firms potentially having to cancel plans for spending on growth projects—while just over a quarter said they would be ‘critically affected’, meaning they may have to make redundancies or close locations. Around 11% of businesses claimed they wouldn’t survive at all.

How would you characterise your current overall business health?

Very healthy

Slightly healthy

Slightly unhealthy

Very unhealthy

Without further government intervention, how do you think the potential recession will affect your business over the next 12 months?

Fatally affected (i.e. insolvency)

Critically affected (i.e. redundancies, shutting of locations)

Significantly affected

(i.e. cancellation of spending)

Our business will be slightly affected (i.e. no further investments)

Our business will not be affected at all

WHAT ISSUES ARE BUSINESSES MOST WORRIED ABOUT?

Next, we wanted to explore the key economic factors that were affecting businesses and how these are changing over time.

When asked what is most affecting them currently, the supply chain crisis came out far ahead, quoted by 43% of businesses at the time of asking. This is over double the amount of respondents that identified labour shortages as their main challenge, which came in second.

This compares to 11% citing decreasing consumer spend and 7% that named the rising costs of raw materials as the factor most affecting their business right now. Notably, 17% said the lack of banks offering funding was their main concern— we’ll address this in more detail later.

LOOKING AHEAD

We then asked business owners to rate to what extent they were concerned about a selection of economic factors that could impact them in the future, and how this differs from six months ago.

Unsurprisingly, inflation came out top, with 67% saying they were ‘very concerned’ (up from 58% six months prior) about how it will affect their future business health, and 29% saying ‘somewhat concerned’.

Interest rates also shot up the priority list—93% said these were a concern. This is up from six months before, when 47% said interest rates were ‘very concerning’ and 35% said ‘somewhat concerning’.

Energy and fuel were also cited by one in ten businesses as a cause for concern in the future, with fuel in particular seeing an increase over the time period. Now, over half say that rising fuel costs are ‘very concerning’ for the future of their business—up from 39%.

Of the below challenges facing businesses at the moment, which one is affecting you the most?

To what extent are you concerned by how each of the following economic challenges could impact your business?

Thinking about the same economic challenges that could impact your business, to what extent were you concerned with each of them six months ago?

A BROKER’S PERSPECTIVE

Allica also surveyed our broker community to understand the mood of the commercial finance sector towards how the recession threat is affecting their clients. 222 of our broker partners kindly shared their insight with us.

We started by asking how rising costs, such as the increase in interest rates and energy bills, have affected their SME clients’ business plans for 2023.

Understandably, the significant majority reported that most of their clients have been forced to make an adjustment of some kind. Just over a third said their clients had their plans ‘severely disrupted’.

However, over half of respondents said that, while the disruption has, of course, had some effect, this was only limited, resulting in them only having to make ‘slight changes’, and that they weren’t overly concerned. Around 6% said it hasn’t affected their plans at all.

HOW HAVE OUR BROKERS’ CLIENTS RESPONDED?

When asked how their clients responded to rising costs, 65% of brokers said they had to delay or reduce their growth plans for the year.

Many reported that their clients were exploring how they could best manage their cashflow—with 48% reviewing their variable costs, a third taking steps to reduce their overheads, 17% reducing staff numbers, and 53% passing on rising costs by increasing their prices.

Notably for commercial mortgage brokers, 22% said their clients had already taken out additional finance, while nearly one in ten of our brokers reported that their clients had moved to cheaper premises.

To what extent have rising costs, such as the increase in interest rates and energy bills, affected your SME customers’ business plans for 2023?

A STRONG DEMAND FOR FINANCE

One thing our SME survey data clearly exposed was that demand for funding remains robust. Some 89% of the SME owners we polled said they will be looking for finance in the next 12 months.

Around 43% said they expect to apply for finance to ensure their business stays afloat, while 37% told us that they would be looking to refinance their existing debt—this may be a result of some business owners wanting to protect themselves from further interest rate rises.

Encouragingly, over a quarter said that, despite the potential recession, they would still be looking for funding to invest in new initiatives and products. Moreover, 22% told us that they would be seeking additional finance to fund expansion.

So, while there is a clear demand for finance simply to keep businesses’ heads above water, the good news is that there’s also plenty of businesses out there still grasping at opportunity for growth and evolution.

THE ROLE OF BANKS AND BROKERS

It’s clear that a lot of responsibility here rests on the shoulders of banks to meet that demand, and brokers to help businesses find the right partner to provide it.

As we learnt before, 17% of businesses cited a lack of funding from banks as their main challenge currently. Similarly, when asked what more a bank could do, 17% said loans should be made more affordable, while the same amount said there should be greater range of options.

Some 10% also told us they needed greater clarity around borrowing. Clearly, there’s demand here for banks to improve their communication and transparency. However, this also highlights the critical role of a broker’s expertise in helping businesses find the right type of funding and finance provider at a time when firms are most in need.

Do you expect to apply for additional funding in the next 12 months for any of the following reasons?

What more, if anything, do you think your bank could do to help you with current economic challenges within the next 6 - 12 months?

Lower rates on loans

Offering better financial facilities/more product options

Lower interest rates (General)

Provide better customer service/support

Transparency and understanding

Reduce service/bank fees

Offer suitable products/services

Flexibility with overdrafts

More flexibility with loans/ offering more loans

Flexible/good rates on accounts

Other

Nothing/nothing else/they are doing as much as they can

FINAL THOUGHTS…

A lot of the data that we’ve covered in this report confirms what many of us were thinking—2023 is going to be difficult year for a lot of businesses. SMEs have already seen their cost base soar, which has resulted in many having to shelve plans for growth or investment, or worse.

However, there is also still a great deal of ambition for growth in the SME community. As we saw, 50% said they would be looking for finance to expand or develop new products or services. And it’s going to be these SMEs that will help Britain push through the other side.

The response of banks and brokers is going to be key as well. Nine in 10 businesses said they will be looking for finance in 2023—whether that will be to help deliver growth, refinance existing debt, or just to keep their heads above water.

Banks will need to continue investing in technology to ensure they can make fast and informed decisions. However, this will need to be backed up with human expertise and decisionmaking that assesses firms on their own merits. It can’t be acceptable to red flag a healthy business simply because of the sector they happen to be in.

The support of a broker, on the other hand, will be vital in enabling businesses to find the solution, and the right funder to deliver it. Without that expert input, SMEs may risk taking on debt that does more damage than good.

Central to all of this will be transparent and seamless collaboration between business owners, brokers and banks. All three will have to match the ingenuity and resilience that saw us through the past few turbulent years. Here at Allica Bank, we have no doubt that together we can do so once more.

UNLOCKING OPPORTUNITIES IN A DOWNTURN—CROUCHERS ORCHARDS HOTEL

Crouchers Orchards is a family-owned hotel and estate set in the West Sussex countryside near Chichester. Having survived two recessions, a financial crisis and global pandemic, it is a prime example of how innovation and creativity can see a business through the hardest of times.

Starting life as a B&B in the 1990s, the business has developed into a renowned multi-purpose local destination, with a bar, pizzeria, restaurant, wedding venue and holiday cottages on-site, alongside its extensive collection of hotel rooms.

Like most hospitality businesses, the pandemic came as a real shock. “Lockdown struck just at the moment we were opening our new cottages and pizzeria,” Carol

to diversify the business will help it remain strong. “People are certainly going to start spending their money differently. As utility and supply costs rise, it will be tough for a lot of hospitality businesses.

“Thankfully, Crouchers Orchards is in a good position. The fact that we have multiple income streams has been vital— we even started growing our own food, which has helped protect us against price rises and supply chain challenges!”

BANKS NEED TO FOLLOW SUIT

You’d have thought the business’ performance would have made it an ideal customer for lenders. That’s not the experience of Carol and her team, though.

van Rooyen, co-owner of Crouchers Orchards, explained. “It hit us really hard, especially as the construction work meant we had been operating at half capacity.

“Fortunately, our new pizzeria business meant we could continue to trade as a takeaway business during lockdown. It was a real stroke of luck, and it meant that we could keep many staff at work, rather than on furlough.”

After lockdown, Crouchers Orchards enjoyed an incredibly strong 2022 as it got back to full capacity and gave its new pizzeria restaurant the grand opening it deserved.

Looking ahead to 2023, with recession looming, Carol is confident that its efforts

Crouchers Orchards initially took a mortgage in 2018 to purchase land surrounding its estate, on which it built its new pizzeria and holiday cottages. However, in early 2022, the business was told it’d need to find a new lender, as its existing bank was exiting the UK.

“This was frustrating; just as we were building the hotel back up after Covid, we suddenly had to find a new lender. And the list of banks willing to talk to hospitality businesses at the time was tiny, regardless of the strength of our business.”

Carol ended up seeking help from Chris Richards, a hospitality specialist at Swoop Funding. “Crouchers Orchards is a fantastic family-owned business. It had never been over-leveraged

“I knew this was exactly the kind of business that Allica likes to support, and that Ben’s collaboration and can-do attitude would make sure it got over the line”

and had shown it knew how to manage the business in tough times,” said Chris.

“There will always be a lender willing to work with a strong business like Crouchers Orchards. You just need to know where to look, how to make an approach, and manage a client’s expectations throughout.”

Chris introduced Carol to Ben Green, Allica’s BDM for West Midlands. “I knew this was exactly the kind of business that Allica likes to support, and that Ben’s collaboration and can-do attitude would make sure it got over the line,” Chris said.

And we were happy to help. “Banks shouldn’t disregard a business just because of the sector they’re in,” Ben said. “Allica is so pleased to support a strong local employer like Crouchers Orchards. Its resilience

is undeniable, and a fantastic example of how to futureproof a business.”

Talking about the deal, Carol said: “We were so relieved to get it done—at times, it felt like no one would touch us except Allica. It means now we can turn our attention to getting on with running our business.”

No surprise, the team is already thinking about how else they can expand Crouchers Orchards. “We’re always coming up with ideas. Next we want to use our available farmland to open up a high-end glamping site!”

Watch this space…

Ben Green

Chris Richards

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Meet Allica Bank

Allica Bank is dedicated to serving the needs of established SMEs (those businesses with 10 to 100 employees).

Built on modern technology, we are committed to keeping human expertise and relationships at the heart of what we do for both brokers and their clients.

2022 was a record-breaking year for us, which saw us pass £1bn of lending to established SMEs and become profitable. We’re looking ahead to another huge year of growth in 2023, having forecast a further £3bn of lending between 2022 and 2024.

We’d like to thank our broker community for the support you’ve provided us along the way. We’re looking forward to working with you in 2023 and beyond!

AT A GLANCE

» UK bank launched in 2020 with offices in Manchester, Milton Keynes and London

» Winners of the Commercial Lender of the Year and Best Specialist Bank categories at the B&C Awards 2022

» In 2022, raised £150m of equity funding and became profitable

» Forecasting to complete £3bn of lending between 2022 and 2024

Nick Baker Chief commercial officer 07702 290 363 | Nick.baker@allica.bank

Anthony Newman

Senior specialist relationship manager, healthcare (South) 07949 314 631 | Anthony.newman@allica.bank

Ben Green

BDM (West Midlands) 07535 061 376 | Ben.green@allica.bank

Brian Bovell

Specialist relationship manager, healthcare (Scotland) 07498 442 680 | brian.bovell@allica.bank

Calum Johnston BDM (Scotland) 07507 641 387 | calum.johnston@allica.bank

Charissa Chang

Broker business development director (North & Scotland) 07494 596 184 | Charissa.chang@allica.bank

Chelsea O’Grady

Central BDM 07494 055 519 | Chelsea.o’grady@allica.bank

Danny McMurdo BDM (South West) 07943 184 754 | Danny.mcmurdo@allica.bank

David Johnston

BDM (North West) 07943 184 754 | danny.mcmurdo@allica.bank

Garry Wilkinson

Broker business development director (Midlands) 07958 370 153 | Garry.wilkinson@allica.bank

Jonathan Prince Senior commercial manager 07949 990 584 | Jonathan.prince@allica.bank

Michael Horner BDM (North East) 07983 129 652 | Michael.horner@allica.bank

Michael Mann

Senior BDM (South coast) 07950 167 153 | Michael.mann@allica.bank

Shay Stanford

Central BDM 07534 853 827 | shay.stanford@allica.bank

Sophie Jones

Central BDM 07572 775 476 | sophie.jones@allica.bank

Stephen Spinks

Broker business development director (South) 07943 184 749 | Stephen.spinks@allica.bank

Tom Procter

Specialist relationship manager, healthcare (North) 07498 988 757 | thomas.procter@allica.bank