Fladgate finds that one in three SMEs don’t anticipate being in business beyond a year
One in three (35%) UK SMEs (and 43% of medium sized enterprises) do not expect to be in business beyond a year, according to a new report by Fladgate, a leading law firm serving the SME market.
Canvassing leadership teams at over 500 SMEs across the UK, the ‘Restart Capital’ report paints a concerning outlook for the backbone of the UK economy. A fifth (20%) of SMEs consider their business to already be in distress, with a further 64% just about surviving on current support measures as Covid-19 disrupts supply chains, causing devastation to sales and soaring debts.
The research found SME leaders are not reacting quickly, with many yet to accept the economic reality and react to save their businesses. One in three SMEs (31%) still claim to be in a ‘shock and denial phase’ or ‘anger and depression’, which may be hampering their ability to decide how best to move forward.
Investment is badly needed to help SMEs survive. Restart Capital finds that 72% of SME leaders are trying to raise money to ride out the storm, but 46% have not succeeded as hoped. As one of the major sources of employment in the UK[ii], this threatens a wave of job losses.
Investors are ready and willing to support SMEs
Facilitating the flow of private capital to pressured SMEs could be the solution. The Restart Capital report found that private investors are willing to deploy capital to support SMEs, with nine in 10 investors (90%) recognising SMEs are the key to the UK economy.
Of note, investors see highest investment potential in supporting troubled businesses, with over a third (37%) of investors interested in distressed companies. A deep-dive into which sectors investors are most interested in allocating capital to revealed that the sectors hardest hit by COVID-19 are often the most attractive. Construction, which SME leadership teams revealed had experienced the biggest hit to turnover – dropping by 39% – is seen as the most attractive sector for investment, with 29% of investors keen to invest in this market.
This is a reality many SMEs are failing to appreciate, however, with one in three (36%) SMEs believing the current climate is unfavourable for access to finance and investment.
Investors offer more than just finance
With the vast majority (85%) of investors wanting to play an active role in their investments, SMEs can benefit from more than just an injection of capital, but also make use of the strategic guidance and experience of distressed landscapes to navigate the remainder of the pandemic and turn business performance around. Of those surveyed by Restart Capital, over 50% had experience of working with distressed companies.
SMEs recognise the benefit of an active partner, with 77% of SMEs looking for an investment partner that will be active and engaged.
Fladgate urges Westminster to encourage flow of private investment into struggling businesses
As government support for businesses in the wake of the pandemic starts to wind down, the majority of SMEs and investors want to see the Government doing more to help the flow of private investment into troubled businesses.
Fladgate is calling on the government to consider implementing a series of policy measures seen by survey respondents to be beneficial. They represent ‘quick wins’ to encourage the deployment of private capital to distressed SMEs. Among the most popular policy suggestions were:
- Tax incentives for investments into distressed business (similar to the popular enterprise incentive scheme but adapted to fit typical distressed investors)
- Delay the introduction of preferential status for HMRC, currently scheduled to be introduced in December 2020
- Government guarantees for loans or other risk sharing for private investors (similar to, but broader than, the CBILS scheme)
- Grants for early advice on strategic options for SMEs
Tax relief for investors has been identified by SMEs as the most effective series of measures the government could introduce to encourage the deployment of capital, supported by 26% of SMEs.
While investors are also supportive of these tax measures (36%), top of their wish list is government guarantees for loans or other risk sharing for private investors’ (similar but broader than the CBILS scheme), with 37% of investors supporting this measure. If the UK government were to introduce such a guarantor scheme, the Restart Capital report found that 39% of total investible assets held by UK private investors is likely to be invested into UK SMEs, demonstrating just how effective such a measure could be.
Jeremy Whiteson, partner at Fladgate commented: “This should be seen as a loud Mayday call by UK SMEs. As the bedrock of the UK’s economy, any recovery plan must address the needs of these firms.
“Government support cannot and will not continue forever. Private investment, therefore, presents a long-term and sustainable solution for troubled SMEs. As government support schemes draw to a close, private investors provide not only critically needed capital but invaluable guidance and support as businesses look to recover financially.
“It’s encouraging that investors are willing to step in and start committing capital to the UK’s troubled businesses; however the government needs to be taking more action to facilitate and encourage the deployment of this investment.”
