Mark Burton of Lloyds Bank Commercial Banking
As Brexit negotiations begin, uncertainty over future trading relationships with the EU and headwinds facing the UK economy are at the forefront of business leaders’ minds. This is why businesses should review how they are targeting growth, says Mark Burton of Lloyds Bank Commercial Banking
Investing in growth is always a risk, but by acknowledging the challenges, you can seek out solutions. On the whole, business appetite is strong - confidence across both the South East and London has risen to an 18-month high in the past six months, according to our latest Business in Britain report.
In the short term, investing in growth can eat into margins. A proportionate increase in profit can take time to feed through, particularly if you’re investing based on an anticipated growth in demand. But investment is usually a long-term bet, often with handsome rewards further down the line.
How can businesses bridge this gap? A starting point is to ensure that they have the working capital needed to cover essential business costs such as payroll and tax.
Manage the risks
Some of the signs suggest we are enjoying a healthier business environment than in recent months. London’s Purchasing Manager’s Index (PMI) registered 55.7 in May, overtaking the UK average, with anything above 50 showing growth rather than contraction. Nevertheless, uncertainty and instability linger in the global economy.
Businesses must review their strategies to ensure they are investing smartly in their future – and identifying risks should be top of the agenda.
In the short term, accelerating inflation, which is at a four-year high of 2.9%, is leading to increased production costs for many businesses.
In the background of the current economic environment, skills shortages are also proving problematic. Across the South East, 52% of firms have reported difficulties in recruiting skilled labour. This in turn is pushing up pay.
The weaker pound is also a mixed blessing for businesses. For exporters, it has been helpful, making British goods and services more competitive for overseas buyers.
Importers, however, and manufacturers in particular, have seen costs rise, forcing them to accept slimmer profit margins or charge higher prices. This is reflected in our latest PMI, which reveals South East firms are battling sharp rises in input costs.
And the biggest unknown of all is the future relationship between the EU and UK. It will most likely be a long wait until we find out the finer details of new trading terms. In the meantime, it is front of mind for businesses.
Securing funding growth – whether for investing in new machinery, increasing headcount or moving to new premises – can seem a challenge. Many firms still use a traditional overdraft or business loan, but there are other funding options available.
Invoice finance and asset-based lending, for example, can unlock cash tied up in a business and help boost cash flow.
Invoice finance works by paying out up to 90 per cent of the value of an invoice, typically within 24 hours of it being issued, so you don’t have to wait up to 60 days to receive payment. This can be particularly helpful for firms trading overseas and companies with long waits for payment.
Asset-based lending, meanwhile, enables businesses with capital tied up in stock, plant or property to increase their working capital by raising funds using those assets as security.
Money can be released from these assets into the business, funding growth plans and helping smooth over peaks and troughs in revenue.
The right tools for the job
Products like these are increasingly popular but awareness of these alternative financing options is still low among many.
In many cases, SMEs will have had limited exposure to instruments like currency hedging, private placements and bonds, but there are also ways of funding growth and mitigating risk that a strong banking partner will be able to provide or advise on.
In any growth drive, it’s vital to have the ear of a trusted adviser when considering these kinds of products. They will be able to help you understand the benefits they bring and if they are the right tool for the business you are building.
It’s this kind of partnership working that ensures banks can provide the support and financing to help Britain’s businesses prosper.
In London and across the South East, many companies are held back from pursuing further growth by a lack of cashflow and access to alternative finance options. With the right combination of risk management, financial support and advice there should be no hurdles to achieving their ambitions.