As we enter 2023, we both look back with fondness following a record-breaking 2022 to mark our 20th anniversary and look ahead to a year that will be characterised by volatility and uncertainty.
Our recent reflections on 2022 highlighted the £2.1bn of funding we provided to UK SMEs across the year as we reached a record total loan book size of £283m and provided over £125m in new facilities. 2022 saw further growth in our revenue and profitability, allowing us to invest in product enhancements and supporting our teams through the personal challenges of this economic environment.
News cycles last year provided ample content for anyone seeking doom and gloom. 2022 was supposed to be the year of post-pandemic re-openings but it became the year of war, persistent high inflation and global energy crises. It was also a year which saw a major shift at central banks to fighting inflation at all costs, the end of the era of low interest rates, and the UK swinging from tax cuts to tax rises and spending curbs. Despite this, the economy has held up better than many commentators have expected, and SMEs have remained remarkably resilient.
As we look ahead, what do we expect and how will Ultimate Finance continue to deliver on our ambitions to support an increasing number of businesses with funding solutions?
Many of the issues of 2022 will remain prominent in 2023, and indeed many of the events of last year will only truly be felt over the next 12 months. Expectations amongst economists are for:
- The economy to formally be in recession over the first half of 2023 – but critically not a deep recession as with 2007-08 or the 2020 pandemic
- Recovery to be subdued and held back by friction in the UK’s trading relationship with Europe, weak labour supply, and low business investment limiting productivity growth
- Inflation to be beyond its peak and to reduce significantly, but for the effects to erode consumer spending and continue to impact behaviour
- Bank of England base rates to reach 4.25-4.5% by the summer and stay at this level for the remainder of the year
- Inflation, reduced demand and built-up liabilities to threaten corporate margins and further increase insolvency levels
- Higher interest rates and increased mortgage payments to weaken the housing market both in terms of transaction levels and pricing but forced sales will be limited by a relatively low peak in unemployment and ongoing forbearance support available from banks
- The buy-to-let market to be pulled in opposite directions by higher rates / stress tests and continued strong rental growth
‘Eye of the storm’ vs. ‘eyes on the prize’
As a general rule, economic forecasts should be taken with a degree of caution because they don’t capture two key variables – psychology and unforeseen events (of which there have been many in recent years). Too much focus on fluctuating forecasts risks losing sight of underlying fundamentals and long-term growth opportunities. In the short-term, changes in asset values and behaviour are influenced more by volatile sentiment than by changes in long-term prospects – underlying fluctuations in prospects tend to be between above average and below average, yet sentiment moves between the extremes of ‘perfect’ and ‘disaster.’
It is said that whilst timing is unpredictable, the only economic constant is the presence of cycles. Thinking of the big picture, it’s more important to know where we are in a cycle than to obsess about specific predictions for what comes next. Whilst it therefore may be appropriate to say that the last six months has seen the UK in the ‘eye of the storm’ with severe pressures building but not yet fully playing out, it’s important to keep our ‘eyes on the prize’ – times of disruption represent opportunity as much as they do challenges, and the long-term matters most, as long as short-term foundations are solid.
During the course of last year, optimism was replaced by pessimism and mindsets moved from risk seeking to risk avoidance. Volatility is always temporary and psychology often moves too far in each direction. Yet it is also important to recognise which aspects of change will have a profound long-term impact – the overestimation of short-term change and the underestimation of long-term change. The change in the interest rate environment is exactly that. The 2009-2021 period of growth and asset price appreciation was to a large degree a function of monetary policy conditions that are a thing of the past, and whilst rates may not reach the highs expected towards the end of last year, we believe they will stay higher for longer than anticipated. Monetary policy operates with ‘long and variable lags’, but after nearly a year of rising interest rates, it is now having an effect on households, businesses and markets, and will continue to do so.
At Ultimate Finance we aim to take advantage of our ability to withstand volatility by keeping a healthy balance between risk and reward. It’s important to adapt to changes in short-term trading conditions but we will ensure our focus remains on our long-term mission of supporting the ambitions of UK businesses.
Lending market predictions
- Mainstream lenders across all sectors will be more focused on mitigating against downside risk in existing portfolios than they will be on growing loan books and increasing new origination
- Lenders will be more forceful and proactive in recovery actions on underperforming loans, and other creditors will equally up the ante on collection activities
- Demand for borrowing amongst SME businesses and property investors will remain high – this is the group that relies most on external finance for working capital and investment – and access to liquidity will be vital in the pursuit of emerging opportunities
- Specialist lenders will step up to fill any funding gaps that emerge and we will continue to see greater use of strategic funding options such as asset-based lending and Bridging
- High debt burdens will act as a constraint for many businesses – outstanding loans to SMEs at the end of September 2022 was 22% higher than in January 2020 – but debt restructuring and consolidation will help extend repayment periods and reduce monthly outgoings
- Lending will continue to be driven by affordability and serviceability rather than only LTV and this will at times be a limiting factor on available leverage – particularly for property term debt on low-yielding residential portfolios or commercial properties
- The lack of awareness among SMEs about different finance options and general market uncertainty ensures the role of a good broker or adviser remains essential and value-enhancing. In turn, lenders must remove friction in application processes and make the securing and operation of facilities easier for borrowers and brokers
Ultimate Finance – keeping business moving
At Ultimate Finance, we will continue to work tirelessly alongside our introducer partners to use our combination of value-add lending solutions and personalised service to keep business moving in the year ahead. Speed, flexibility, personal relationships, quality service and funding certainty will remain differentiating factors that will be our focus in 2023.
We remain committed to supporting the ambitions of SMEs and property investors through the challenges ahead, and we will step up while others step back.