Business investment in the UK has fallen away badly during the pandemic, as the economy has been ravaged by lockdowns, restrictions and galloping commercial uncertainty. The Office for National Statistics reported that by the end of Q3 2021, it was still 10% below pre-pandemic levels despite overall GDP being only 2.3% down.
The implications of this shortfall are serious as worn out plant and equipment cuts productivity still further and as other developed economies move faster into areas of technology and innovation, leaving us trailing in their wake. Without sustained investment, the UK will end up significantly less competitive as the global economy recovers after the worst of the Coronavirus crisis.
Investment intentions
The good news is that entrepreneurs here are aware of the issue and intend to address it this year and beyond. A survey of 2,000 owners of SMEs in late 2021 by the alternative finance provider, MarketFinance showed that 70% of SME’s plan to increase investment in 2022. 25% will hire extra staff and 24% will spend on new plant and equipment. Omicron may have delayed these plans, but is unlikely to have cancelled them. The Office for Budget Responsibility is predicting a 10% surge in investment this year. So will you join the investment crowd?
The ‘Super-deduction’ tax allowance
The government has deliberately encouraged investment by announcing in March 2021 that firms could claim a tax allowance of 130% against expenditure on most categories of capital expenditure between 1 April 2021 and 31 March 2023. This will give investor companies a 25% reduction in tax liabilities, so that a £10,000 capex spend would reduce tax payable by £2,470. There are other tax incentives for certain spending outside normal capex.
Raising finance
Clearly there will be issues with raising further funding for many businesses weighed down by debt taken on under the various government-backed Coronavirus loan schemes, as well as by legacy bills for unpaid rent and deferred VAT and payroll taxes.
Nevertheless, for viable businesses with credible investment plans, finance should be available. The question is from whom? The MarketFinance survey also revealed that 71% of SMEs no longer believe that traditional banking products were the best solution to investment funding. Interestingly, 37% expected to take on extra borrowing to pay for investment in 2022 rather than use cash reserves, so this most likely to come from specialist asset-based lenders or crowd funding platforms.
Presenting financial information
No matter where funding comes from, it will only arrive if the pitch is supported by high quality information, based on historic data but more importantly, current management information and a comprehensive forecast package relying on well-researched and reasonable assumptions. The two key elements will be the ability to justify the forecast assumptions and clear explanations for the inevitable pandemic scarring in the most recent historic financials.
What should you invest in?
The buzz words in all reporting on investments plans right now are ‘sustainability’ and ‘resilience’, improving the environmental profile of businesses and making them less vulnerable to another shock like Covid. 81% of the MarketFinance respondents cited these objectives as their priorities.
30% of respondents were considering the M&A route for investment, looking to find compatible ‘bolt on’ growth or to move into new commercial areas. Improving export performance is another key focus area, with 34% planning to sell more overseas or start exporting.
The other issue front and centre of the debate on investment priorities is digital infrastructure, technology, robotics and automation through artificial intelligence. This may seem like the stuff of science fiction, but the spend is often far lower than more traditional modernisation and the productivity gains considerably higher. The acceleration of the trend from physical trading to online selling in retailing prompted by the pandemic is one reminder of how radical change can be forced on businesses. The WFH revolution is another.
The challenges
If finding the funding was all that was needed to kick start an investment programme, life for entrepreneurs would be simple. Brexit and Covid have thrown two other gigantic spanners into the works. Sourcing the capital equipment will be impacted by the ongoing global supply chain chaos, while labour market changes may make hiring the additional staff required more than just a challenge. It could prove to be Mission Impossible.
Business benefit
That’s easy. Unless you continue to evolve and grow, your business will stagnate and you will be overtaken by braver, more nimble competitors who will steal your market share, savage your profit margins and seduce away your best people.
Business investment support
If you are looking for support in putting together, funding and then implementing an investment plan, Opus is here for you. We have extensive experience of these scenarios. One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.