The International Monetary Fund recently expressed guarded optimism about the state of the global economy, even as it cut its forecasts for output and warned about the catastrophic impact of a potential U.S. debt default.
Furthermore, forecast for UK growth this year received a significant upgrade to 1.4%, up from July's estimate of 0.9%. UKGDP figures and other economic data have, for the first time in years, bucked the usual gloomy trend, and are pointing to higher growth and an improved trading environment for firms in the next few years.
Nevertheless, there are growing concerns within businesses, primarily, that the banking industry will potentially put a brake on growth rather than provide the necessary funds to support it. How then, can businesses take advantage of alternative financing, expansions overseas and ‘up-skilling’ to ensure they thrive on signs of early recovery?
Big businesses’ expansion drive
The appetite for risk among Britain's big businesses is at its highest since before the financial crisis and companies are finally ready to start spending their cash piles, according to a recent survey on the UK economy.
For the first time since 2011, expansion is a higher priority than cutting costs and building up cash for CFOs at some of the UK's largest companies. The launch of new products and new markets is being put ahead of the defensive strategy of cash hoarding that has characterised big businesses since the global financial crisis. Deloitte's quarterly survey puts corporate risk appetite at a six-year high. As it seems more likely that the financial crisis will pass and the Eurozone will hold together, smart businesses are looking for export and expansion opportunities abroad to really take advantage of these early positive signs.
Despite this expansion drive, big businesses are facing challenges due to the acute shortage of skills in the UK labour market. This runs the risk of derailing the nascent economic recovery. Skilled jobs are going unfilled because of a lack of suitable candidates, with the mismatch most serious in the oil and gas sectors and IT and construction. In Europe, the only countries facing greater talent mismatch challenges are Spain, Portugal and Ireland.
Businesses need to look at new ways of up-skilling existing employees and training new graduates to fill their skills gaps. Only then can they take full advance of economic recovery and expansion.
A cautious optimism from smaller businesses
The latest information from the BDRC Finance Monitor for SME lending released in August 2013 shows that small businesses believe a recovery is finally underway. There is a growing positive business sentiment, with 51% of SMEs looking to grow their businesses in the next 12 months, and this positive drive is set to increase as further evidence of positive economic activity becomes available.
However, despite encouraging signs of economic recovery, there are growing concerns amongst businesses that the banking industry will be unable provide the necessary funds to support it.
The proportion of businesses using traditional banking products remains low with only one in three SMEs using loans, overdrafts, commercial mortgages and credit cards – almost unchanged from the last quarter at 33% and maintaining the downward levels witnessed over the past two years. Phil Orford MBE, Chief Executive of the Forum of Private Business, said there was an, “Urgent need for the banks to lend to businesses looking to grow and employ. Without further support for Britain’s SMEs, a key driving force behind the economy, the recovery could stall before it has been given a chance to take hold.”
How can SMEs capitalise on the favourable economic climate?
Businesses need to have access to more information about the current finance support schemes, more comprehensive advice on the alternatives available and easier access to the appeals process when they are denied credit on the high street.
In order to stimulate further economic activity and growth, businesses need to seek out a mixed portfolio of options, which includes turning to alternative means of financing. In order to fund further growth the UK has seen a 5% increase in the number of SMEs turning to external finance, however, in some cases this includes turning to friends and family.
Several forms of alternative financing are becoming more trendy, including invoice financing that frees up the money tied up in unpaid invoices. An invoice finance provider will typically buy the debt from you for 90% of its value meaning you get the money in advance. New financing methods have also appeared with the digital age, including ‘crowdfunding’, the latest trend in business funding. Businesses can either try to attract funding through pitching on public sites such as Crowdfunder or applying to join a lending marketplace where they can pitch online to a community of funders.
Conclusion: The challenges for policymakers
Pulling the global economy out of a contracted period will require, first and foremost, advanced economies to address old challenges, and also emerging market and developing economies to make it through their growth transitions with credible policies.
Some progress has been made in the euro area, where policy actions have reduced major risks and stabilised financial conditions. However, growth in the periphery is still constrained by credit bottlenecks. Banks will need to be more proactive in providing the liquidity the economy needs and promoting awareness of, and access to, the financial mechanisms in place to support lending. Meanwhile, businesses, particularly in the SME sector, need to seek finance elsewhere to capitalise on the early recovery days.
Big businesses need to continue to focus on international expansion and export, whilst finding ways to attract skilled workers and to implement education policies to meet businesses' needs.
The economy is recovering, but smart businesses that want to take advantage of this, need to be considering their growth options and moving quickly to stay ahead of the crowd.