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‘Once bitten, twice shy’ SMEs hold onto their cash as cost inflation rises

POSTED: 13th September 2013
IN: Newsroom
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SMEs are intending to hold onto their cash in the current environment, as annual cost inflation in the UK increased from 1.0% to 1.1% for the first time in a year.

  • Annual cost inflation among SMEs rose to 1.1% in Q2
  • Cost of credit rises for smallest firms; drops for medium-sized enterprises
  • Confidence up as business environment improves
  • Investment intentions remain weak as SMEs hold onto their cash

While confidence among SMEs continued to rise this quarter, investment appetite remains weak with SMEs expecting to increase capital investment over the next year by a mere 1.5%, which is well below pre-financial crisis levels of 3%.

The latest findings in Aldermore Bank's quarterly SME Inflation Index shows that the small rise in cost inflation has been propelled by an increase in average wages this quarter, which grew year on year to 1.9% in Q2 2013. This is in part explained by firms delaying bonus payments until the 2013/14 fiscal year to take advantage of the reduction in the top rate of tax.

The cost of financing remains higher than a year ago with the average interest rates offered to small businesses* 1.49% higher than those offered to medium-sized businesses.

This rising cost of credit for the smallest UK companies may be contributing to an increase in the number of business liquidations. There were almost 4,400 company insolvencies in Q2 2013, up from 3,850 the previous quarter.

However, despite some of the ongoing challenges being faced by SMEs, the UK business climate continues to strengthen, as UK GDP increased by 0.7% in Q2 2013, up from 0.3% growth in Q1. UK exports showed a particularly strong performance, increasing by 3.6% in real terms in Q2, with exports to China, Hong Kong and France being key contributors.

Aldermore Group Commercial Director Mark Stephens says: "Although this quarter saw a slight rise in annual cost inflation, we expect this to fall back as the impact of increased wage growth levels out in the next quarter.

"It is interesting to note that although SMEs are experiencing higher confidence, they are holding onto their cash and appear reluctant to invest. This suggests businesses are suffering from a case of 'once bitten twice shy' syndrome, choosing to hoard their cash rather than invest it, after the past five years of pain.

"Despite an upturn in the British economy, SMEs realise we are not yet out of the woods and are playing it safe.

"Aldermore offers alternative financing for SMEs including the smallest firms struggling to access credit and we are here for business owners when they have been turned away by other lenders."

**Ends**

Aldermore Group Commercial Director Mark Stephens will be available for interviews between 11.30am and 1.30pm on Friday 13 September.

For further information journalists can contact:

Nicola York, Cicero Group, nicola.york@cicero-group.com

+44 (0) 207 297 5965

FULL REPORT

For further information about Aldermore, our financial backers and our PR contacts, please review our Notes to Editors page.

* Small businesses are defined as those with annual debit account turnover on the main business account of less than £1 million. Medium SMEs are those with annual debit account turnover on the main business account of between £1 million and £25 million.

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