How can SMEs replace capital quickly to support COVID-19 recovery? 

There’s no escaping the devastating impact that COVID-19 is having on the small business community. Many SMEs have gone into survival mode; something we spoke about in a recent blog post from our CEO.

However, while SMEs are developing strategies for managing immediate financial concerns, they may not be thinking about what’s around the corner. Many small businesses will experience a second critical cash flow point after they resume trading, and this capital shortfall could threaten their business once again.

To help small businesses avoid this trap, WeOwn is taking a look at how decisions companies make today could affect their financial viability tomorrow – and how to protect resources to allow rapid financial recovery.

Today’s decisions affect tomorrow

We’re in the middle of an economic crisis, and SMEs are being hardest hit. Reduced trading capabilities have impacted cash flow, with two thirds of UK small businesses now begging the government to return to ‘business as usual’ by the end of the month.

But while revenue has dropped significantly, it’s important to bear in mind that outgoings have been reduced as well. Government measures such as business rate relief, deferral of VAT payments and the employee furlough scheme have allowed business owners to offset some of the cost of coronavirus. And for any costs that cannot be avoided, many small businesses have dipped into cash resources to fill the funding gap.

As a result of these measures and strategies, SMEs are starting to see green shoots of hope, and feel more confident that they can keep their company running until the world starts returning to normal. But how will the decision to use business capital affect their financial stability when they are allowed to open their doors and begin trading again?

Avoiding an economic ‘second wave’

WeOwn is concerned that the steps small businesses are taking to safeguard their financial situation now may damage their future prospects.

If capital locked in their balance sheet – for example, working capital – is released and used through the trading slowdown, that money is no longer available to fund activities when businesses are permitted to increase their operations. It will have taken many SMEs years to build up this capital; how can they replace it quickly enough to ensure long-term survival?

Much like social reintegration may cause a second spike in cases of COVID-19, a return to ‘normality’ following lockdown may cause a second economic shock for SMEs. The latest research suggests coronavirus has already cost UK small businesses more than £277,000 each, and 64% expect their revenue to halve in the coming months.

In line with these findings, business that dipped into capital resources may find their ability to trade at pre-coronavirus levels is significantly impacted. These firms won’t be able to capitalise on a surge in sales, as consumers enjoy new-found freedom to spend again.

The capabilities of small businesses will also have a much broader impact on economic prosperity. In the UK alone, SMEs account for 60% of employment and around half of private sector turnover. To put it simply, it’s in the national interest for these companies to be in a strong trading position.

Choosing P2P loans over working capital reliance

So how can SMEs avoid the finance trap? The answer lies in looking for more effective short-term business funding solutions, which avoid having to dip into capital resources.

Some companies have already tried to fill the gap by applying for initiatives like the UK’s Coronavirus Business Interruption Loan Scheme. However, only 7% of firms have successfully logged their application and received funds – with many complaining of a bottleneck in the approval process.

Other small businesses have applied for loans through their bank. But access to mainstream finance has always been a struggle for SMEs, and the major banks have only just agreed to ease their loan application terms, despite companies having been in financial crisis for several weeks.

Both these options are impractical for many small businesses, who need rapid access to capital that can be easily paid back once normal trading resumes. They need a better solution.

A quicker way to secure short-term finance

In the COVID-19 economic crisis, alternative business finance is making a huge difference to SMEs. Fintech platforms are offering a quicker, simpler way for small businesses to secure a short-term cash boost across a broader range of sectors, by adopting a tech-driven funding model.

Instead of relying on a complex network of partners and intermediaries, alternative finance providers connect companies with investors directly, through options like peer-to-peer lending. This approach cuts out the red tape and paperwork that prevents SMEs from accessing mainstream bank loans or government schemes.

Technology-driven peer-to-peer lending platforms like the one being created by WeOwn are making it possible for businesses to check their eligibility and apply for a business loan within minutes, with no up-front fees. And the value of rapid access to capital cannot be overestimated in current tough trading conditions.

Connecting with a new type of investor

There are further benefits to taking an alternative approach to business finance. Digital P2P lending platforms also provide access to investors with an appetite for something new and fresh, outside the spectrum of high street lending.

SMEs are able to negotiate with these lenders, to agree interest rates that work with their finances. This ensures that there is a realistic and achievable timetable in place for paying back loans, especially as investor-negotiated contracts aren’t held to standard bank terms and conditions.

Making smart financial decisions for the future

The more we can encourage SMEs to look at alternative options like peer-to-peer lending, the less likely we are to see a ‘whiplash effect’ when these business are allowed to open their doors again.

A new, digital approach to short-term finance is the quick resolution that small businesses need to secure their livelihood while trading is tough, without damaging prospects for when the market begins to return to normal.

By looking at alternative finance routes, business owners can feel confident they are not robbing from their financial future to pay their current bills. Instead, they are creating a solid foundation on which to accelerate their trading capabilities when coronavirus restrictions are eased. This can only be a good thing for their long-term business prospects.

SMEs can sign up to WeOwn’s alternative finance platform for free to connect with investors and raise business capital within days with our peer-to-peer lending programme, when it launches soon.

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