SMEs confident they can safely navigate choppy waters ahead

Looking back at 2022

With a feeling that businesses were looking at the worst effects of the pandemic in the rearview mirror, there was definite optimism about the road ahead at the start of 2022 – but then, as we all know, a series of new challenges emerged in the shape of supply chain issues, rapidly rising costs, political change and weakening consumer confidence.

Significant among those rising costs has been wage inflation as clients in just about every sector struggled to attract and retain staff, while already-tough trading conditions have been exacerbated by the growing frequency of strike action – for example, the impact of rail service stoppages on the hospitality and leisure sector.

So, after a good deal of optimism at the beginning of the year, by its end uncertainty about the future and the increased cost of borrowing persuaded many businesses to postpone capital expenditure decisions.

One positive aspect, if you can call it that, is how businesses have become super tuned into developing a determined resilience. Already battle hardened by the unprecedented effects of Covid, the impact of Russia’s invasion of Ukraine and political change in Westminster has taught them they need to continually be considering a plan B, C and D in these uncertain times.

Many of the challenges of 2022 look set to continue in 2023. Against this economic backdrop, we’d expect many businesses to continue to be cautious about investment decisions and many businesses are starting to look ahead to the next general election and possible impact a change of Government may have on their operations.

Rising energy costs

The cost of energy will be an important consideration for all businesses across industries. The latest Government energy support package will see the Price Cap removed at the end of March for businesses in England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. All businesses are likely to see a rise in costs although energy-heavy sectors will see higher discounts available. In the short term, cash and profits could be impacted and some businesses may look to increase prices or reduce costs and energy consumption to try and maintain margins.

Whilst investment in longer term solutions may hit corporates as an extra cost in the short term, it might also be imperative for businesses to look at how they can future-proof their running costs by developing a more sustainable/renewable approach to their energy consumption. With sustainability high on the agenda for many businesses, it is important that the cost of doing business does not overshadow this important transition. For projects with long-term sustainability at the core, sustainable financing may be a suitable option to support any immediate shortfall in cashflow.

Digital’s transformative potential

There’s almost no sector of business that isn’t being transformed by the adoption of digitisation and that trend is going to continue as our clients grapple with finding ways to use technology to be more efficient, less reliant on manual labour and meet changing consumer expectations.

These expectations include super-fast service and flexible payment options, using platforms such as ApplePay and GooglePay. Cashless payment systems are a key area of expertise for Barclays so we’re well-placed to support businesses in this area. However, a note of warning, our clients tell us attempts at digital fraud against them are still growing, with cyber criminals using ever more sophisticated imposter tactics.

There are also opportunities to gain competitive advantage from the increasing consumer demand for businesses to meet the goals of the environmental, social and governance (ESG) agenda by offering more sustainable products and services.

Growth through exports

For those SMEs looking to expand and grow in 2023, we think there are possibilities in export markets, with some businesses able to take advantage of the UK’s new freeports when they fully come on stream in 2023. There are government support resources available for would-be exporters and, here again, Barclays has plenty of expertise to offer, including in foreign exchange and financing solutions.

Sterling’s relatively weak position against other currencies will boost exports and should also be good news for the hospitality and leisure sector, making the UK more attractive to inbound tourism. It also makes possible another boom year for the staycation with perhaps many British holidaymakers choosing Cornwall over Crete and Margate over Marbella for their two-week holiday.

Holidays of course won’t be the only kind of discretionary spending that’s affected in a prolonged recession, posing a big threat to some businesses. That may provide stronger, well-capitalised and larger businesses with the chance to make opportunistic acquisitions and Barclays, as ever, is keen to support them in their growth ambitions.

No sign of panic

However, in general, we’re confident most companies will prove to be resilient in 2023. We don't detect any panic in our regular conversations with clients – far from it – in fact, they're confident in their businesses, recognising some choppy waters ahead but determined to navigate them safely.

Many of our SME clients have decades of businesses experience that often spans a couple of generations in the same family – so there’s pride, provenance, and a strong focus on making sure those businesses get through any headwinds in good shape and are then ready to kick on.

It can be easy to get a bit gloomy with many negative economic headlines, but our overarching impression is that while there are headwinds for SMEs, many of those Barclays works with are doing well – and we don't really expect that to change. There might be blips but generally speaking there are still lots of reasons to be confident.

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