At the start of last year, small and medium-sized businesses across the UK were grappling with one of the most challenging periods in history. 

The COVID-19 pandemic raged, Brexit happened and the Trade and Corporation Agreement (TCA) was brought in – creating significant changes to the process of importing goods into the UK from the EU. 

One year on and the situation has gone from bad to worse. SMEs have struggled to grow in the Brexit era and a post-COVID funding crunch has been felt by millions since the government withdrew most of its pandemic support schemes. 

Cost of living squeezes SMEs

As a result, companies have less liquidity. UK trade ties with Europe have fallen drastically with up to a third of small businesses cutting back on exports as Brexit red tape takes its toll. On top of this crisis, the cost of living and running businesses has shot up across the country, with inflation expected to rise to 7.2% by the end of this year.  

As a result of wholesale volatility and other factors, fuel and energy bills have also become even more expensive for companies, to the point where their monthly statements are startling. SMEs, on average, are facing gas bill hikes of more than 250% from last year.  For larger businesses, costs could rise by as much as 310 %. 

Predictably, these increases are making it difficult for companies to manage their operating expenditures and to stay above water. Instead of growing their businesses and dominating global markets – many are literally wondering whether to keep the lights on or adjust their ambitions. 

So what can be done to help businesses with spiralling costs continuously eroding small and mid-size business margins? How do you tackle the liquidity crisis? 

Post-Brexit issues facing the UK’s SMEs 

The main obstacles SMEs are dealing with now are logistical challenges in supplier and customer relationships. Over the past six months, one in four SMEs has seen supplier prices almost double, while the share of SMEs holding debt has more than doubled since the start of the pandemic.

There has also been a significant amount of new additional checks and documentation, such as customs declarations, supplier’s declarations and rules of origin regulations. SMEs have suffered the most, with fewer resources to cope with such changes. 

Another big problem is late invoice payments. Many companies are growing quickly but they don’t have the liquidity to scale because their invoices are not being paid on time, which has a knock-on effect on their overall operations – because these businesses can’t pay their own staff without a steady, reliable income – or the related costs of trying to run a business in a Brexit world. At a time where the cost of living has reached a 30-year high, companies need every penny they have to pay their own bills on time. If suppliers are late paying, then companies will struggle to keep the lights on, keep their profits and grow their business.  

At the start of 2020, one survey showed that UK businesses alone were chasing more than £50bn worth of late payments even before the pandemic hit, with the average small business chasing five outstanding invoices at one time. The fallout of COVID-19, as well as changes to business due to Brexit and the cost of living, have only served to exacerbate the issue meaning that SMEs don’t have enough liquid cash to survive while waiting for payments to be settled, which can take as long as 120 days.

Managing cash flow in today’s economic climate remains the most significant problem facing UK SMEs. The monthly insolvency statistics for December 2021 states that  the number of registered company insolvencies in England and Wales increased by 20% from last year – and that number is expected to rise in the next 12 months. 

Insolvency due to cash flow issues remains a continuous threat for many SMEs – but there are a number of resources available for companies to boost resilience.

Government support

Designed to help UK-based businesses affected by COVID-19 manage cash flow, investment and growth, the Recovery Loan Scheme has been extended until 30 June 2022. The initiative is only open to SMEs, meaning that businesses can only apply if their turnover does not exceed £45 million per annum. 

Invoice payments up front

Invoice financing has also been hailed as a lifeline for many SMEs over the recent turbulent years after liquidity fell by 80% since the onset of the pandemic. Simply put, invoice financing allows companies to draw advances against unpaid invoices due.

Typically, invoice financing companies buy newly-issued invoices and pay around 80% of the invoice upfront to the SME. When the invoice is paid by the buyer, the business receives the balance of the invoice minus agreed fees or discount. 

Cloud-based financing platforms are enabling small businesses to overcome liquidity problems with flexible, quick and easy access to advance payments. 

FX lock-in rates

As geopolitical changes have impacted currency markets over the past year, with currency fluctuations influencing input costs and profit, Foreign Exchange providers can help by locking-in rates to protect against further currency movements. 

Surviving 2022 

Currency is a crucial consideration for SMEs considering moving into new markets due to new trade agreements that the UK government is currently investigating with countries outside of the EU. If these bring in improved trade conditions for UK businesses, there could be a first-mover advantage to exploring these markets and choosing the optimal currency for invoicing can make a significant difference in the long term.

All in all, it remains a challenging year for many SMEs, with the effects of Brexit and cost of living continuing to reverberate. While new trading conditions will take some time to settle, those SMEs who have already started to look further afield for new international opportunities and to tap into resources that are available to them are the ones best positioned to ride out the remainder of these turbulent times.