Empowering the Freelance Economy

Self-employed to get rough deal says new report

The self-employed could see interest rates increase just as funding decreases/ Photo by Photo by Andrea Piacquadio
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Freelancers and small business owners looking to apply for business loans and credit cards this year can expect to see less competitive rates and even less funding, finds a report

Small business lending is not looking rosy in the UK. That development has little to do with the health of the companies looking for funding but rather bad business decisions made thousands of miles away in California and Switzerland. A policy made by the Bank of England late last year is also having a huge impact.

In November 2022 deep within a report by the Bank of England’s Prudential Regulation Authority, the BOE called for a 32% increase in challenger and specialist bank capital requirements for SME lending alongside other capital constraints for most IRB banks. This move will very likely reduce overall SME lending by 25% or up to £44bn, according to economists from consultancy Oxera.

So it appears small business lending was already headed towards a rough patch long before the collapses of Silicon Valley Bank and Credit Suisse.

SMEs left out of the UK’s bigger economic picture

“There is a real risk that lending to the SME sector may become even more expensive, leading to a reduction in the provision of credit and higher interest rates,” said Oxera in a report. “If the SME sector finds it more difficult to access credit and must pay higher interest rates for borrowing, it is likely that this will compromise the ability of SMEs to scale up and create jobs.”

It makes any small business owner think whether the Chancellor of the Exchequer Jeremy Hunt had any idea that this was brewing in the background.

Mr Hunt outlined back in January how he intends to deliver economic growth over the coming years:

“Our plan for this year remains to halve inflation, grow the economy and get debt falling. But all three are essential building blocks for much bigger ambitions for the years beyond.

“World-beating enterprises to make Britain the world’s next Silicon Valley. An education system where world-class skills sit alongside world-class degrees. Employment opportunities that tap into the potential of every single person so businesses can build the motivated teams they need.

“And opportunities spread everywhere just as our talent is spread everywhere.”

Hunt, since that statement, has announced in the Spring Budget an even more ambitious target to bring down inflation closer to 2 per cent by the end of 2023.

FSB National Chair Martin McTague is not convinced that small business growth will reach its potential this year due to the Chancellor’s lack of focus on small businesses and their role in the British economy in his Spring Budget.

“The distinct lack of new support in core areas proves that small firms are overlooked and undervalued,” said McTague. 

FSB’s Martin McTague says the self-employed have been overlooked by the current government

“Budgets are about tough choices, and with today’s billions of pounds being allocated to big businesses and households, 5.5 million small businesses, and the 16 million people who work for them, will be wondering why the choice has been made to overlook them,” he said.

In his estimations, the Budget failed to offer help on energy costs to small firms and there was no move to exempt more smaller firms from business rates.

The FSB said there was a clear lack of understanding of the role that SMEs will need to play in economic recovery: “Trickledown economics here simply does not work,” said McTague, referring to the £27bn given to big business.

UK banking system is “safe and sound”

Despite what might be happening with banks in the US and Switzerland, the Bank of England is content that the “UK banking system is well capitalised and funded, and remains safe and sound.”

These very words were included in a statement by the Bank of England reported in response to the Swiss authorities greenlighting UBS’ take-over of the collapse of Credit Suisse to avoid another banking crisis.

While that is indeed in writing, the average person on the street may not be so convinced that their money is safe in a banking system that is part of an economy that the IMF said will contract by 0.6% in 2023. Arguably, it would be hard for them to be confident that interest rates will not go up again following in the footsteps of the European Central Bank, which raised rates across the eurozone by 0.5 percentage points last week to 3.5%.

Decision makers at the ECB fear that inflation will be prolonged and better to do something about it sooner rather than later. Yet the ECB’s 0.5 percentage point rise is still lower than the UK, which stands at 4%.

The FTSE losing 2% of its value on Monday morning in response to the Credit Suisse and Silicon Valley Bank double whammy is not helping. So, freelancers will be wise to speak to independent financial advisers and mortgage brokers to learn how they can protect their savings by ensuring they have spread their wealth in more than one banking brand; get the best deal on their mortgage and ensure that you are making the most of your tax benefits and seeking alternatives to bring personal and business costs down.

And what if you are looking for a business loan or credit card, what are your chances of getting a competitive deal? That is looking harder by the day. However, given the group efforts by Central Banks to ease the Credit Suisse and Silicon Bank failures, it’s looking like the US Federal Reserve Bank may hold off raising interest rates this week, which could also be an indicator that the Bank of England will also hold off.

Is there a bright side to all of this bad banking news?

Nigel Green, the CEO of independent financial advisory deVere is looking for the bright side in all of this and that’s that the banking sector and so-far avoided fallout for the wider global financial system strengthens the case that central banks will “ease up on interest rate hikes.”

“Central banks know that besides having to try and tame stubbornly high inflation, they also need to ensure financial stability,” said deVere. 

Nigel Green of deVere: “The stepping back from interest rate hikes will be welcomed by investors who are concerned that overtightening now.”

“The events of the last week which rocked confidence will certainly give them cause for pause.

“The stepping back from interest rate hikes will be welcomed by investors who are concerned that overtightening now – when monetary policy time lags are notoriously long – could steer the economy into a recession,” he said.

Both the Federal Reserve and the Bank of England meet this week.

The deVere CEO concluded, “It’s been a bumpy ride over the past few days but successful contagion containment, the solid fundamentals of most banks, central banks rushing to inject liquidity, and the growing case for interest rate hikes to be paused will be cheered by global markets.”

What’s happening with UK house prices?

Some promising news has also come out of Rightmove’s March house price report.

“Sellers are taking a punt on higher asking prices,” says Sarah Coles, head of personal finance, Hargreaves Lansdown.

“They’re hoping falling mortgage rates and the spring selling season will support some fairly optimistic pricing – particularly at the pricier end of the market. Unfortunately, there are a few signs that some of this confidence may be misplaced, and that they may well need to do a deal to secure a sale,” said Coles.

However, according to the report, asking prices remain pretty punchy, up 3% in a year.

“This has been driven by asking prices for larger properties – which are up 1.2% in a month,” saidColes.

“However,” she says, “this end of the market isn’t shifting as fast as it did in the same period in 2019, or as fast as slightly smaller homes. It’s a reasonable indication that they may not quite achieve these prices. This is even more likely when you consider Zoopla’s findings that home sellers are cutting prices by an average of £14,100 – or 4.5% to shift their properties,” she said.

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