With no real end in sight to the Iran War, let’s explore the impact on SMEs (small and medium sized enterprises) and the steps they can take to plan ahead with confidence.
If you were to ask SMEs to define their experience over the past few years in one word, I would bet that “unstable”, “uncertain” and “unpredictable” would come out on top.
You’d be forgiven for hoping that the post-Covid years would bring a restoration of calm and stability. Against the backdrop of the war in Ukraine, the resulting surge in energy prices and now ongoing conflict in the Middle East, that stability has remained elusive. For many SMEs, the impact of global disruption isn’t always obvious or direct. A local retailer or construction business might have little visibility over where the materials or components they rely on actually come from. What they do see is the end result – higher prices filtering through supply chains and adding to already rising business rates, labour costs and other day-to-day expenses.
That’s not to mention the situation at home. The apparent revolving door at Downing Street, combined with a constant “will they, won’t they” tax hike debacle, has left business owners trying to second-guess the direction of travel at Westminster for years. While Burnham feels like a break from this merry-go-round loop, only time will tell.
If a dog is man’s best friend, then stability is a small business owner’s, and it’s something that’s currently in seriously short supply.
The ripple effects of geopolitical conflict
It’s hard to understand how a conflict thousands of miles away on a different continent could impact a business here in the UK, but in today’s connected world, the effects can be felt distinctly. Disruption to key shipping routes is already forcing longer journeys and pushing up freight costs, which can mean less predictable delivery times and more cash tied up in inventory. For SMEs, that kind of disruption often translates into tighter cashflow.
It has implications for their customers too. When you don’t know if your supplies are going to be delivered on time, projects can be delayed and invoices can take longer to be paid, meaning firms are spending far more time managing the day-to-day than planning for the long term.
It’s estimated that disruption to certain shipping routes due to the closure of the Strait of Hormuz has added 10-16 days to maritime journeys, with surcharges of thousands of pounds per container, adding to the already growing cost pressures facing SMEs.
Pulling back on finance
When unpredictability is high, it’s normal for business owners to want to claw back any certainty they can get. People become more risk-averse – after all, you don’t want to commit to big investment or expansion plans if the goalposts could change again next week.
Our research shows that geopolitical conflict and uncertainty have led 79% of SMEs to delay decisions about taking on external finance. It’s even higher among sectors like construction (89%) and hospitality (88%), which may be more reliant on goods or materials imported from overseas.
This caution has its own ripple effects across the economy, causing businesses to postpone investment in new staff, equipment and services. External finance can also give SMEs the flexibility to adapt to changing conditions, whether that means diversifying their products or services, finding alternative suppliers or bridging a short-term cashflow gap while they adjust their own prices.
The trust factor
However, the picture is a bit more nuanced. It would be easy to reduce this to a simple equation – geopolitical uncertainty equals SMEs being frightened to invest.
Rather, there is also a problem with how debt is perceived, which is exacerbated during uncertain times. Our research found that over half (51%) of UK SMEs believe debt is a bad thing.
We need to change this perception if SMEs are to grow during periods of geopolitical uncertainty. We need to remember that we’ve all interacted with debt in some shape or form, whether that’s to buy a home, a car, a mobile phone, or a pair of swanky new trainers on Klarna. It’s no different for businesses, yet borrowing can sometimes be seen as the scary bogeyman to be avoided.
This is where SMEs need to choose the right finance provider when seeking external funds. In fact, forget the word ‘provider’ and think instead about a ‘partner’. Open up a dialogue with your broker or lender so they truly understand your objectives and why you’re seeking finance in the first place. That way, they’ll be far better placed to make a recommendation and assess the best options.
Sometimes the right answer may be to delay an investment or seek a different product, which is why SMEs should collaborate with their broker or lender to choose the best course of action and ultimately feel more confident in the lending process.
Building confidence for growth
For all the challenges that SMEs have faced over the past few years, optimism is definitely on the up, with the latest BDO data suggesting that business activity rose over the summer against a backdrop of warm weather and England’s World Cup run.
The key will be turning this bounce back into long-term momentum – and ensuring SMEs have the confidence to access the finance they need to grow will be central to that.
