Small businesses take out higher loans as inflation rises

Demand for bigger business loans has increased by eight percentage points in 12 months, though growth remains the top motivator behind finance applications.

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Written and reviewed by:
Helena Young

After months of rising costs, entrepreneurs could be forgiven for expecting a respite from the cost of living crisis.

But while the government drags its feet on the issue of financial support for the UK’s small business community, SMEs are borrowing more to improve their cash flow.

Small business lender iwoca's recent SME Expert Index reveals that demand for loans over £200,000 rose by eight percentage points between Q2 2021 and Q1 2022.

Amid a Bank of England prediction that inflation will hit 11% by the autumn, iwoca – which distributed nearly £400 million to small businesses through the Coronavirus Business Interruption Loan Scheme (CBILS) – has reacted by raising the maximum size of its Flexi-Loan to £500k as demand for larger business loans grows.

Something borrowed and something grew

Global inflation rates have risen dramatically this year to cause record high energy prices and fuel rates. The triple threats of Brexit, COVID-19, and the war in Ukraine have combined to form an extraordinarily tough environment for small businesses in the UK

On average, small businesses have so far lost £186,249 each, according to a recent survey by Fiverr.

Encouragingly, reinvestment in business growth was the top reason for borrowing money given by SMEs in iwoca’s survey, with 43% of borrowers citing this requirement.

This signals that a small majority of entrepreneurs are still determined to innovate and scale – a crucial requirement for economic growth and recovery.

It’s not all good news, however. According to  iwoca’s research, two of the most common drivers for taking out a loan were ‘managing day to day cash flow’ (31%) and ‘bridging occasional cash flow gaps’ (10%).

So far, the UK government has done little to relieve pressure. Last month, the newly-appointed small business tsar, David Buttress, proposed a taxpayer-funded ad campaign that will ask entrepreneurs to lower prices to encourage consumer spending.

How can your small business raise funds?

As the saying goes, money makes the world go round. Even the smartest, most innovative idea will still need to maintain a steady cash flow to stay afloat.

Business bank loans are one of the most popular routes – although, as inflation rises, it’s important to research providers and compare interest rates to avoid potentially getting into debt.

At Startups we have been helping small businesses to better manage their finances for over twenty years.

If you are looking for ways to raise money during the current economic turbulence, there are several funding routes at hand. These include:

  • Invoice finance
  • Government or local government business grants
  • Alternative finance
  • Investors or angel finance
  • Private debt (loans from non-bank lenders)

Have a read of our comprehensive small business finance guide to learn more about the options available.

Written by:
Helena Young
Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.

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