By Mark Parsons, Corporate Lending MD for Shawbrook Bank for the Midlands and North SMEs have had a tough few years, first with the impact of the cost of living crisis, then with supply-chain issues adding to their own rising production costs. Still, many persevered and looking back, they should be extremely proud of their […]
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By Mark Parsons, Corporate Lending MD for Shawbrook Bank for the Midlands and North
SMEs have had a tough few years, first with the impact of the cost of living crisis, then with supply-chain issues adding to their own rising production costs. Still, many persevered and looking back, they should be extremely proud of their agility and adaptability to respond to challenges the economy presented. Despite the struggle, many also seized the moment and grew their services. This determination was evident in Shawbrook’s research late last year, with 29% of SMEs reporting higher than usual growth in 2023, despite a challenging economic backdrop.
Earlier this year, with inflation continuing its retreat towards more normalised levels, and talk of the Bank of England Base Rate being on a path to reductions, we noted initial positive rumbles for 2024. The announcements of new investment schemes in the Spring Budget should have further boosted business confidence across the UK. This turn in the economy will no doubt be very welcome with many businesses gearing up for the next stage of their journey – whether that is expansion and growth, acquisition or an MBO and exit. Especially those that have remained in a holding pattern awaiting confidence that trade levels, margins and general business outlook had stabilised and on a more positive trajectory.
For SMEs looking to expand and grow, increased efficiencies will take centre stage – both in terms of resourcing to have the right team on board, updating machinery or the digital transformation of their business to increase efficiencies. With this in mind, we are already seeing an uplift in demand for cashflow solutions and refinance as SMEs aim to amplify the inherent value within their businesses and create headroom for growth and diversification.
Interestingly, we had already seen a perception change around Asset Based Lending (ABL) in the last year. We had introduced product enhancements in 2023 to provide greater flexibility and simplify the delivery for our clients. As a result, ABL has become a principal consideration for companies who are now using this as a strategic tool to help create headroom and provide flexibility for growth too. Whilst leveraged finance has traditionally been a facility for service based firms, and ABL one for more asset heavy groups, SMEs are unlocking the full potential of hybrid solutions that tap into the benefits of both products.
Unsurprisingly, merger and acquisition activity, whilst experiencing bursts of activity was broadly flat last year. Sectors like Wealth Management had a reasonably strong record of consolidation as older generation management of smaller and more niche advisory firms moved to exit and retire, whilst others looked to buy and build to present a credible alternative to consolidators. Naturally, some of these firms held steadfast or were reticent in making this move previously. With the recent shift in the market, we are now seeing an acceleration in merger and acquisition activity and expect to see more businesses turning to buy and build opportunities also.
There are also those businesses that have maintained a steady growth last year and, whether a gradual or substantial incline, they may well be ready to complete acquisitions or mergers now. Similarly, some Private Equity houses will have opted for a breather last year and be focused on portfolio expansion again. Securing debt funding is a popular option to speed up acquisitions and once again, we should see an increase in this activity over the next few months.
Succession planning naturally has a broader remit with some businesses preparing to sell as owners retire, others choosing an MBO or then opting for an Employee Ownership Trust (EOT) arrangement. Whichever exit strategy is taken, preparation is key and there can be quite a few moving parts to consider.
EOTs for example, are generally funded through deferred consideration based on future profitability, which means that shares are sold by the shareholders on a deferred payment basis, with instalments being paid over a period of time. In this case, external funding can streamline the process, facilitate a smooth transition and enable business-as-usual without the need for instant management changes.
Despite the positive turn we are seeing in the market, there are still some factors SMEs will no doubt be considering. Firstly, we are in the run up to the next general election which always creates economic uncertainty. There is also ongoing political instability in Eastern Europe and more recently, businesses are faced with the Red Sea Shipping Crisis which is greatly impacting on the global supply-chain and the cost of goods for manufacturers and construction companies, albeit falling inflation is providing some respite here. Keeping all this front of mind, some groups will still be playing their ‘building resilience’ card as they boost stock levels and look at their supply network, and aim to retain working capital for any further bumps in the road.
All in all, 2024 has started as a stronger and more positive year for the UK economy, and although challenges on the supply chain and staffing front need to be factored, SMEs are well positioned to capitalise on new opportunities. I would encourage SMEs and their advisors to keep an open mind about the options they have to fund their strategic initiatives. Companies will also benefit from working with a funder who gets to know their objectives and tailors solutions that provide the flexibility and agility to support them with their growth journey in 2024 and beyond.
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