UK manufacturers are bracing themselves for challenging business conditions as the global economy struggles with the impacts of rising inflation.
According to the Office of National Statistics, factory gate prices of goods produced by UK manufacturers increased by 15.7% year-on-year in May 2022. That represents a 10pp increase on the prior month and points to the highest producer inflation since June 1980.
This period of inflation is presenting UK manufacturing with a ‘perfect storm’ of operating challenges. “Businesses face an unprecedented convergence of cost pressures,” said David Bharier, Head of Research at the British Chambers of Commerce (BCC). “With the main drivers coming from raw materials, fuel, utilities, taxes, and labour. The continuing supply chain crisis, exacerbated by conflict in Ukraine and lockdowns in China, has further compounded this.”
According to a recent survey by alternative finance provider, Capify, just under 60% of SME manufacturers are now worried about the impact of rising costs and inflation on their businesses.
The Capify Q1 Business Confidence Survey also finds that rising costs are putting strain on cash flow and working capital position of many SMEs. Thirty-seven percent of respondents cited cashflow as a major concern (up 14pp from 23% in Q4 2021), whilst over half of the survey respondents (53%) were concerned about the levels of cash in the bank.
These inflationary pressures are putting enormous strain on many SMEs. Even if sale prices are rising in-line with inflation, the higher cost of production can have a hugely detrimental impact on cash flow and working capital. According to Capify, 47% of SMEs identify these working capital and cash flow struggles as the primary driver for seeking external finance. But only 52% of those surveyed state that they would not be confident of securing that finance from their traditional banking partners.
Against this backdrop, Capify has launched a new £40m fund to specifically help SMEs in the manufacturing sector to deal with these challenges.
“Our most recent survey presented a very stark picture of the manufacturing sector”, added John Rozenbroek, chief operating officer at Capify. “Whilst many smaller businesses were optimistic about their potential to grow sales and headcount, there was a real sense that cost of production – and the availability of finance to manage them – is an increasing concern”.
“These underlying concerns will have been accentuated by this continued period of inflation and the attendant, and unprecedented, price rises throughout the supply chain” he added.
Learning from the past
As was the case in the aftermath of the 2008 financial crisis, demand for finance from SMEs is increasing across the manufacturing sector.
“As we saw in that last great recession, traditional banks restrict their lending criteria in uncertain times and make it difficult for SMEs to get the finance they so desperately need. Our new fund is a specific response to this gap in the funding landscape and underlines that alternative lenders like ourselves will have a vital role to play in helping SME manufacturers navigate these headwinds and capitalise on opportunities when they come.”
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