Combatting the ‘cost of running a business crisis’

In this guest article, Richard Prime, Co-CEO and Co-founder of Sonovate, explores how businesses can use embedded finance to tackle the growing costs of running a business.

As 2020 will evermore be remembered as the year of the Covid-19 pandemic, 2022 will go down in the history books as the year when the world was rocked by a staggering cost of living crisis.

With UK inflation the highest in 40 years, far outpacing wage growth, people in the UK have been hard hit by rising food costs and soaring energy bills. But the crisis has affected businesses too, many of whom had just started to recover after Covid and had not yet returned to growth.

Last month, 12 months on from our first Future World of Work survey, we commissioned our second report* to re-examine the work landscape with its fresh challenges, as businesses and workers alike navigate the cost-of-living crisis. What we found were businesses struggling with rising operational costs and cashflow but also having to meet workers’ demands for higher salaries. Just over half (52%) of business respondents had increased salaries for their talent in the last year but 43% of businesses didn’t expect to be able to afford these inflated salaries for long.

We found that problematic payment pain point persisted, with over a quarter (27%) of businesses taking more than 90 days to pay their contract staff – three times longer than the average time for permanent employees – not because they didn’t want to, but purely and simply because of cashflow, with businesses continuing to struggle to access finance.

This chimed with a survey we ran earlier in the year, where 54% of businesses said that cashflow was the main reason they needed to borrow or access funding. Yet over a quarter struggled to access finance from mainstream lenders. This has a knock-on effect on all areas of the business – a similar proportion said they had lost contract workers due to not being able to pay them promptly.

While shocking, this sadly isn’t new news. A recent announcement from the Financial Conduct Authority (FCA), warned banks to improve their treatment of small business owners after a review found ongoing instances of lenders treating small businesses unfairly when it came to areas including a sustainable payment plan, identifying and supporting vulnerable customers, and ensuring fairness. But our research found that a third (35%) of businesses surveyed said that banks provide them with no other service or support beyond lending.

As the cost-of-living crisis continues to impact businesses across the country, being able to access finance quickly is vital to survival. Research from asset management firm, Close Brothers, published in August 2022 found that four in ten (44%) small business leaders expected to accelerate their finance plans in response to the prospect of further rate hikes. But if mainstream lenders won’t lend, then what?

With fast access to credit and instant funding decisions, alternative finance is perfectly positioned to plug this gap and provide business owners with a lifeline through this incredibly challenging period, where funding is likely to be needed more than ever to grow businesses.

Our research showed that businesses which have already turned to non-traditional forms of finance are seeing tangible benefits. Over a third (37%) of businesses we surveyed said that alternative lenders make it easier to access funding, and three-quarters (76%) say that invoice financing tools have greatly benefited their business, with around two-thirds (64%) citing faster transactions and business processes as key advantages.

Embedded finance can provide a much better value proposition. Businesses benefit from a contextual, seamless experience with automated payroll and accounting, while costs are reduced from greater efficiencies and no late payment fees. The most forward-thinking embedded financing options use a wider range of live data than traditional providers, so lenders can assess risk more accurately and faster.

With convenient embedded finance options and instant funding decisions, businesses are not encumbered by the cash flow problems that have plagued supply chains over the last year, which is a major advantage for businesses to not have to worry about. Previously underserved businesses now have access to financing that can make the difference between growing their business and shutting shop.

The rise of embedded finance marks a new era for businesses and building and managing relationships with financial services more broadly. Done in the right way, it means that businesses can access finance, at point of need, aiding cashflow and helping to ensure long-term sustainability.