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Recession Risk Sparks Concern in SMEs as Demand for Finance Rises

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Small business owners are concerned about the possibility of a recession, according to iwoca’s latest quarterly SME Expert Index.

With both the cost of living and of doing business climbing, over three quarters of brokers surveyed (77%) say their small business clients are worried about the possibility of a recession. By contrast, fewer than 7% of brokers reported their SME clients as ‘unconcerned’.

iwoca’s Q2 2022 SME Expert Index is based on insight from UK brokers who collectively submitted over 1350 applications for unsecured finance on behalf of their SME clients in June.

Demand for finance increases as small business owners contend with rising inflation

As small businesses face mounting economic uncertainty, their demand for finance has risen sharply. Almost half of brokers (46%) submitted more loan applications for small business financing in the last month compared to the one previous – a continuation of an upwards trend since the end of last year, with 28% citing the same in Q4 2021, and 34% reporting increased loan demand in Q1 2022.

In addition, the latest SME Expert Index saw 0% of brokers reporting significantly fewer applications.

The survey also reveals that small businesses are looking for larger loans in light of the turbulent economic forecast. Over one in eight brokers (13%) identified £200,000+ loans as most sought after for small businesses, the highest proportion since the Index was first released. Looking back at this trend, demand for loans valued above £200,000 has steadily increased since iwoca’s first Index in Q1 2021 when only 4% of brokers reported these larger loans as the most commonly requested.

To meet this growing appetite for high value loans in the small business sector, iwoca recently announced that it is more than doubling the maximum size of its core lending product, Flexi-Loan, allowing small business owners to access business loans up to £500,000, up from a previous lending cap of £200,000.

Managing cash flow a key priority amidst the economic storm

This heightened demand for financing, and larger amounts of it, suggests small businesses are gearing up for financial strain: in particular, cash flow issues. Over a third of brokers (37%) reported managing day-to-day cash flow as the most common loan purpose for small businesses. This represents an increase of 6 percentage points since last quarter.

Nonetheless, as in Q1 2022, brokers report ‘growing the business’ as the most common reason for small business owners to apply for finance, although it’s down by 3 percentage points since Q1. So, whilst managing day-to-day cash flow is becoming more important, small businesses are continuing to seek loans to finance broader growth ambitions. 

Steven Scoufarides, Head of Broker Channel at iwoca , said:

The current economic outlook for small businesses is precarious – we are seeing signs of an increasing number of SMEs searching for finance solutions to manage their cash flow and brace for the potential of a recession. But, as they’ve proven time and time again, small businesses are resilient and will shield themselves against this economic threat in every way they can; encouragingly, it looks like most are still seeking finance to grow their businesses, rather than to holster it up. At iwoca, we’re working hard to adapt to small businesses’ needs, which is why we’re now offering  the higher-value loans up to £500,000.

Leanne Barry, Broker at LB Finance Solutions Ltd, added:

We have definitely been receiving more applications from smaller businesses over the last 2 months since the Recovery loan scheme came to an end. This is mainly from businesses that either did not manage to source any government backed funding, or indeed have already used any funding they received for cash flow and are now needing further funding to stay afloat.

SME Expert Index

This SME Expert Index from iwoca provides a snapshot on what’s driving small business owners to borrow, the trends seen in the types and value of finance being accessed, and how these patterns change over time. iwoca publishes this index every quarter to capture the experience of brokers working with small businesses.

iwoca is reaching 2.3 million businesses across the UK and Germany through its embedded lending technology, which allows businesses to access loans through a range of platforms such as accountancy software apps and digital neo-banks. In June 2020 the lender launched iwocaPay – an online buy now pay later invoice checkout to help small businesses get paid. Most recently iwoca launched a Revenue Based Loan, where businesses can spend on growth and repay at their own pace, based on their revenue. The company also offers free mental health support for all small businesses in the UK, in partnership with online therapy platform Spill.