For SMEs, the year 2023 could mark a “turning point.”
They have shown resilience “despite persistent inflation and the war in Ukraine, but they are now having to face rising interest rates which is making life tough for them for three reasons,” according to iBanFirst, one of the global providers of foreign exchange and international payment services for companies, present in 10 European countries.
The first impact of rising interest rates is “the increase in the cost of borrowing, which affects SMEs more severely than large corporations.”
While large companies can opt for equity financing and secure funding through bond issuance or private placements, SMEs “don’t have so many options. High credit risks, lack of market visibility, associated costs, and legal complexity make debt issuance a daunting task for many small businesses. Bank debt then becomes the only lever to innovate, finance transitions, or carry out acquisitions.”
Except that credit offers vary depending “on whether you’re a major player or a smaller business.”
The differentiated rates penalize “the competitiveness of SMEs, and sometimes makes it simply unaffordable for them, with consequences that are felt over several years, whether it’s postponed investments or increased default risks. Many SMEs are now bypassing necessary investments, thereby compromising their future competitiveness.”
The second impact of rising interest rates is “a direct hindrance to business, with smaller players more exposed to economic slowdown.”
During the second quarter of 2023, “the number of EU businesses declaring bankruptcy increased for the sixth quarter in a row. It’s the highest number since 2015. Compared to the previous quarter, the number of bankruptcies was up by 8.4%.”
Among the sectors impacted “by rising prices, real estate, construction, retail, and manufacturing are on the front lines. But beyond these sectors, an entire economy based on cheap money is at risk of stalling: that includes the automobile industry fueled by leasing offers and the leisure economy (travel, etc.) inflated by installment payments. Everywhere, players are facing dwindling demand amid widespread concern.”
The largest ones will have the strength to cope. But are there lifelines “for the others? What will happen to all the companies forced into numerous payment delays?”
This brings us to the third difficulty SMEs face “because of rising interest rates. The new world of high interest rates could have been a godsend for them. But the truth is that SMEs still largely miss out on the yields promised to large companies. Large corporations have the means to place their excess cash in various accounts. They have the compelling arguments to demand compensation for their current accounts. They are largely shielded from the rise in interest rates. The same can’t be said for SMEs.”
The iBanFirst update also notes that the reality is that a weakened SME fabric “won’t benefit anyone.”