SMEs need to fight through the perfect storm

SMEs hit hard by Brexit, the pandemic and the Ukraine invasion now face a spate of steep interest rates hikes as central banks grapple with rising inflation.

The past two years will be remembered as among the most challenging trading periods in living memory, but the story of the personal challenges ordinary business owners have faced and overcome during this time has yet to be written.

And, just as the hardworking SME owner had perhaps hoped they might be out of the woods, interest rates are soaring after fourteen years of record low rates.

On the face of it, it might seem counter-intuitive that Central Banks should react to the current commodity and food crisis by hiking interest rates. It’s true that, historically, their default response to high inflation has been to ramp up interest rates to reduce the money circulating in the economy by dampening demand—but the current rise in inflation isn’t down to excess demand.

It’s down to the supply issues brought on by the war in Ukraine, and labour shortages prompted by the sudden upswing in post-pandemic business activity.

Such external factors will prove stubbornly hard to change through interest rates hikes, and their impact on businesses in the second half of 2022 will be significant and two-fold.

Firstly, business costs will rise when many can least afford it, taking more funds out of the working capital that is sorely needed to repay arrears that arose during the pandemic.

The second impact may be even more hard-hitting. SMEs across many sectors depend on consumer confidence to reach their monthly revenue targets.

When confidence falls in response to external factors, such as rising inflation—and, in particular, mortgage costs—discretionary spending tends to fall and SMEs reliant on consumer spending bear the brunt.

So, how can they respond to this new threat? First, the agility and flexibility many business owners developed during the pandemic will continue to be essential in the day-to-day running of their business as costs rise. Shopping around has never been more critical.

Second, for business owners that cannot see a way out, there are options. The advice is to look into the Small Company Administration Rescue Process (SCARP).

Since its implementation, SCARP has seen schemes with creditors – including Revenue – supporting nominal dividends of around 2.5 percent, with the balance of warehoused arrears being written off in full.

This is an unprecedented and very welcome show of support from Revenue towards fundamentally sound, viable businesses – who can continue to sustain employment, thereby saving jobs.

After enduring a torrid two years, business owners need all the help they can get. For many, the SCARP process could be the lifeline they need if rising interest rate prove to be the last straw.

Source:  Chartered Accountant Ireland

 

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