5 Key Challenges Facing SMEs in 2022
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5 Key Challenges Facing SMEs in 2022
2021 has been a real test of resilience for SMEs. Added to the existing challenge of COVID have been new disruptive factors, including a supply chain crisis, which led to an increase in demand for working capital, as well as rising inflation and labor costs, all reducing their ability to generate economic growth.
Whilst government-backed schemes such as the Bounce Back Loans Scheme (BBLS) and Recovery Loan Scheme (RLS) have provided a lifeline for small and medium-sized businesses (SMEs) facing significant liquidity pressures, SMEs need a plan in place to avoid these challenges becoming a structural issue which will stifle their future growth and imperil their survival.
Whilst the UK economy is currently on track to be the fastest growing economy in the G7, there are five key areas of risk which need to be managed by SMEs to ensure they can capitalise on and contribute to economic growth in 2022.
- Inflation
- Interest Rates
- Recruitment
- Technology
- Green Transition
1. Inflation
The UK Government has announced that CPI inflation could hit 5% in 2022, driven principally by increasing energy costs, as the economy demonstrates fundamental symptoms of heating up. Supply chain issues have been more prevalent than ever as shortages of labour, skills, energy, and raw materials add to the escalating list of headwinds that SMEs face heading into 2022. SMEs will also need to be able to distinguish between temporary and permanent inflation – with some areas impacted by inflation such a labour costs being potentially irreversible.
The rising costs of goods and utilities, coupled with a tightening of the labour market and subsequent wage inflation, will result in an unprecedented demand for working capital and SMEs will need to ensure they have sufficient liquidity provisions to operate in this inflationary environment. Increased inflation will also force businesses to scrutinise their internal pricing models and decide whether they can sustain margins with higher input prices or choose to pass down the cost to consumers.
2. Interest Rates
Following the sequence of lockdowns in the UK, small business owners are finally experiencing a resurgence in demand for goods and services, with many seeking credit to meet this growth in demand. The governor of the Bank of England, Andrew Bailey, has however, indicated that the recent jump in inflation will necessitate an interest rate rise which will disproportionately affect small businesses reliant on funding in their early stages of growth.
With a rate hike on the horizon and the cost of borrowing set to increase, SMEs would be well-advised to take stock of their current capital structure and if appropriate, access fixed term, fixed rate loans to prevent exposure to an increasingly volatile lending market.
3. Recruitment
Adding to the number of plates that SMEs must spin in 2022, is the increasingly challenging task of retaining and recruiting skilled staff. The pandemic has radically changed the working environment, fostering new challenges and responsibilities for business owners to contend with. The workforce is becoming increasingly transient, demonstrated most prevalently in the last year and a half, with SMEs having to adapt and recruit from a wider talent pool as the era of cheap labour comes to an end.
A tightening of the labour market putting upward pressures on wages, compounded by a lack of skilled labour due to the ramifications of Brexit, is having a further negative impact on firms’ working capital. Moving into the new year, SMEs will have to diligently balance the need to attract skilled staff through financial incentives whilst ensuring they have sufficient working capital to continue operations.
4. Technology
The necessity of businesses to digitalise has seldom been as pressing. UK firms are faced with a crippling supply chain crisis, with major retailers’ stock levels at their lowest since 1983.
Digitalisation and the use of AI can support SME integration into global markets by lowering transaction costs and those associated with transport and border restrictions. It also supports innovation and allows firms to compile data and analyse their own operations in new ways, enhancing performance.
Yet despite the benefits and opportunities that digital technologies bring, many SMEs continue to lag in adoption. Indeed, many face a financing gap in the advancement of technology. If firms are serious about leveraging fintech and innovation to streamline operations, the role that alternative and traditional lenders play in the provision of much needed credit should not be overlooked.
5. Green Transition
During the COP26 Conference, over half of the UK’s largest businesses committed to moving to net-zero by 2050, with a considerable number of SMEs pledging to take part in the UN’s Race to Zero. Environmental awareness amongst consumers and employees alike is swiftly becoming non-negotiable, meaning that firms who are not investing in sustainability credentials risk falling behind their counterparts.
SMEs face significant barriers to entry in the transition to the new economy including a lack of funds but also by way of established business models and access to critical technology. Firms need to address how they can leverage public and private investment to reduce their carbon footprint and become more resource efficient, demonstrating their commitment to the green transition.
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