UK engine of recovery running out of oil

Accountants have warned that the worst effects of the recession have yet to hit SMEs, jeopardizing the UK's economic recovery.

The annual Credit Check survey, from Venture Finance and Accountancy Magazine, indicates that almost two thirds (60%) of accountants believe that a further increase in SME insolvencies is still to come. Respondents predict that 10% of their clients will soon be insolvent.

The recession's long tail

The survey of 250 UK accountants reveals that despite the economy's tentative return to growth, over a third of SMEs (36%) are still being held back by the "long tail" of the recession, performing worse in Q2 2010 than in the same period in 2009. 1 in 3 accountants now classify UK business strength as weak or very weak.

Peter Ewen, Managing Director at Venture Finance commented, "SMEs are the engine of economic recovery but the research suggests that they are still struggling to access the finance needed to move from a survival mentality to one of growth."

"Accountants are telling us that traditional financing methods are not meeting today's business needs and it is essential SMEs understand the full repertoire of funding they can access," he said.

A working capital time bomb

The majority (60%) of respondents believe that their clients are currently focused on stabilizing performance rather than growth (25%).

They also report that more than a quarter (27%) of UK SMEs are shrinking and some even dying due to a lack of working capital. 25% have been labeled as "exceeding their working capital" with almost a fifth (18%) at risk of overtrading.

Moreover, 70% of accountants forecast that the upturn will not come before cash availability improves for the sector. Yet 80% report that their clients have lost faith in traditional finance sources.

All is not lost however, as most accountants believe there is a ready solution for their clients' working capital constraints, with 53% reporting that Invoice and Asset Based Lending is now the most effective form of financing to support SME growth.

Ewen added, "It's reassuring that accountants are increasingly recommending Invoice and Asset Based Lending and we have certainly seen an increase in enquiries over the past year. Given the resounding advocacy demonstrated by accountants within the research we expect this trend to accelerate even further.

"With ongoing economic uncertainty and an increase in VAT looming, any SME that's planning for growth needs to meet the market from a position of strength. Invoice and Asset Based Lending is a sustainable source of funding that automatically grows in line with a business's sales ledger, providing the liquidity needed to take advantage of opportunities without putting itself at risk," he said.

"Coupled with Bad Debt Protection, which offers peace of mind against customer insolvency, this will enable SMEs to confidently move towards growth, refueling the economy as a whole," concluded Ewen.

By Roberta Murray

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