SME: Navigating credit squeeze

Many SMEs in Europe are finding it difficult to stay afloat as governments use higher borrowing rates to combat inflation. SME Bank tries to assist by providing some potentially important guidance.

The CEO of SME Bank, a neobank in Lithuania that serves small and medium-sized businesses (SMEs), is Virginijus Doveika. Here, he discusses how SMEs can endure a “credit squeeze” and challenging macroeconomic conditions.

Higher interest rates are the favoured weapon used by governments in Europe to combat inflation. Politics-wise, it’s less detrimental than tax increases.

This is the traditional “credit squeeze,” in which the system is forced to expend money in order to prevent actions like raises in wages and prices.

We are travelling in that direction in Europe and other parts of the world. Concerns about what may happen next are understandable given that base rates in the Eurozone are at 4.25 percent (they were only 0.0 percent as recently as September 2019).

SME credit is scarce

History indicates that business is going to face difficulties and that squeezes are painful. The impact on SMEs is probably going to be particularly severe. Four out of ten small businesses in the UK had been denied credit, according to a poll conducted by the Federation of Small Businesses more than four years after the banking crisis began in 2007–2008.

Furthermore, research, particularly that conducted by the OECD, shows that SMEs are more affected by financial constraints than bigger businesses.

How come? Compared to larger businesses, which have access to internal finances, trade credit, and capital markets, SMEs rely more on bank funding. SMEs have less negotiating power, lower credit ratings, and less assets to pledge as collateral, making them more susceptible to changes in lending conditions, such as increased interest rates, tougher collateral requirements, or shorter maturities.

Indeed, it’s hardly surprising, given these challenges, that a recent analysis from the UK’s Centre for Economics and Business Research (CEBR) projects that in 2024, rising loan rates will force 7,000 SMEs to stop operations on a quarterly basis.

Positive aspects?

It’s not all bad news, either. Those same studies demonstrate that squeezing enhances the mix and quality of the SME sector. In hard times, more financially stable and productive businesses tend to outperform less effective and highly leveraged ones.

Squeezes, then, are a Darwinian fight from which the victorious emerge, primed to flourish in the subsequent up-cycle.

Six actions SMEs should take right away to guarantee their long-term success

Going into denial about the pinch is pointless. It’s here, and SMEs must figure out how to flourish in spite of the challenges by adapting.

1. Prioritise budget and cash flow monitoring. Being visible and aware is crucial amid a credit crunch. Track budgets and cash flow with bank-connected online accounting tools. Real-time data reveals holes and shortcomings early. This allows quick and nimble responses, which is vital in a weak economy. With cloud-based financial monitoring and control, you can see problems early and make smart decisions to expand your business. Being prepared wins half the survival war.
2. Search for alternative financing. Increase your cash while banks cut lending. Use non-traditional finance sources. Cash flow can be increased by peer-to-peer financing, invoice discounting, supply chain finance, and crowdfunding. Find SME-specific tax breaks, grants, and subsidies. Your aggressive expansion plans may require private equity money. Working with other companies may reveal complementary abilities. Moreover approaching financing widely creates resilience. Don’t only rely on banks—use your ingenuity to find the money you need to prosper.
3. Negotiate with clients and vendors. A good negotiator can help cash flow. Ask suppliers for longer payment terms, bulk discounts, or other benefits. Hint towards growth and loyalty. To get clients to pay faster, provide discounts or extras. Wise deals reduce the cash flow gap. However, seek win-win arrangements to maintain bonds when conditions improve. Better cash conversion cycles and credit monitoring help maintain working capital and reduce bad debts. Play negotiation well.
4. Concentrate on worthwhile projects. When credit is tight, value-added activities must be prioritised. This requires tough judgements so senior executives may focus on your competitive advantage’s unique skills. You must develop and protect your skills because customers can’t find them elsewhere. You can outsource or delegate everything else. Recognise sharp work and praise innovation and growth. Stay calm amid pandemonium. With a lean structure and defined goals, you can weather turbulence better than competitors who inflate costs to sustain non-essential operations.
5. Create and tweak. SMEs must find ways to create new products and services, penetrate new markets or niches, and adapt to changing customer and market expectations. Challenge assumptions, grab new opportunities, and anticipate client needs. Prototype new company strategies, products, and services quickly. And then this can be done by adopting digital transformation and employing new technologies to boost productivity, efficiency, and customer experience. To accelerate progress, collaborate with partners and encourage adaptation and innovation by letting people improve methods.
6. Take advantage of telecommuting. Innovation in the workplace saves money and retains talent. Remote work, flexible scheduling, and sabbaticals help employees stay competent and save money. Hiring specialists reduces payroll costs. Learning new skills and having autonomy at work may invigorate people. Set output goals and let people select how to get them. Furthermore you may deepen your relationship with digital collaboration tools and frequent check-ins. Driven teams outperform expensive ones; boost involvement on a budget.

Finally, it won’t be simple at all. A credit crunch, however, presents both opportunities and difficulties. That is manageable with caution, dexterity, and creativity. When things get better, utilise these six tactics to keep expenses under control, add value, and motivate employees, you’ll emerge from the situation leaner and more focused.