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COVID-19: a catalyst for change amongst SMEs

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Ahead of this year’s Small Business Saturday on 5 December,  our Managing Director of SME Lending, John Phillipou, explores Paragon’s latest research and how the COVID-19 pandemic has impacted businesses.  

There were 5.9 million small or medium-sized businesses (SMEs) recorded in the UK in 2019, accounting for 60% of all private sector jobs. They are undoubtedly crucial to the UK economy and have faced a multitude of challenges over the past few months. With there being no defined end in sight for the coronavirus pandemic, the future is uncertain for many.  

However, whilst it has been a difficult time, we have seen resilience and innovation come to the fore of our SME customer base, as businesses remain agile and evolve to the changing environment – targeting new customers, changing suppliers, producing new products and considering new technologies.  

SMEs are taking the learnings from the first wave of the pandemic and implementing them permanently in their business, to the benefit of both the company and the wellbeing of employees.  

So, is it possible that whilst challenging, the coronavirus pandemic has been a needed catalyst for change for many businesses? 

Recent research by Paragon explored the areas in which SME decision makers have seen this evolution take place across their companies and how it might underpin businesses as we enter the second phase of the pandemic. 

The positive impact of COVID-19 

Despite the challenges presented for SMEs over the past few months, results show that it has been a constructive period for some. Most notably, 49% believe that the learnings from the pandemic will help their business become more resilient in the future. A fifth (18%) say COVID-19 has in fact had a positive impact on customer demand and 16% say it has had a positive impact on productivity. Overall, 15% of SMEs stated that they were faring better as a result of the pandemic.  

Businesses say employee working arrangements have improved, with more productive ways of working adopted and with both home working and flexible hours being ingrained in the ways in which they operate. Half stated that there was no impact on recruitment. This was notably higher among smaller businesses. The shift to increased homeworking is likely to reduce costs for SMEs, whilst also impacting customer demand for SME that supply products primarily targeted at offices and workplaces.  

How SME customer bases have evolved 

The evolution of customer bases during the pandemic has seen region, profile and type of customer changing for many businesses. Over a third of companies (34%) that had previously sold direct to consumers have adapted so that they now also offer products and services to business customers. Conversely, a quarter of companies (24%) that predominantly have small businesses as customers have experienced more sales to consumers.  

In addition, two in five (42%) businesses say their business is now more localised, whereas 45% have increased their geographical reach. 

SME growth in online and social media channels 

Over half (52%) of SMEs operating online have seen their sales increase as a result of the pandemic, rising to 62% amongst those businesses with 20-49 employees. As coronavirus restricted physical sales, the pandemic also prompted one in five (21%) of SMEs to start offering products or services online, broadening their distribution channels. 

Meanwhile, nearly half of SME decision makers stated that they increased the use of social media channels to promote their products and services and increase communication with their customer base. Use of Instagram and Twitter for businesses has risen, with Instagram seeing the highest increase, at 51%. 

Facebook (61%) is the most popular social media channel for SMEs to use for their online business activities. Over two fifths (43%) of those businesses that use Facebook to support their online business operations say that their levels of activity on this channel has increased since the start of the COVID-19 pandemic, while 47% have stayed the same. 

It will be interesting to see the opportunities that the shift to online brings for businesses over the next few months, particularly for those upping their social media use. 

Brexit still a concern for small businesses 

Whilst this research explores the impact of COVID-19 on SMEs, we’re continuing to see a sense of uncertainty caused by Brexit amongst our SME customers, particularly with the end of the current transitional period looming on the 31 December 2020. 

Smaller SME businesses are less likely to be impacted as they tend to focus on the domestic market, however those larger SMEs with more exposure to Europe would like more clarity on what changes may emerge, particularly around aspects such as import and export tariffs and supply chains. Most business can adapt to whatever situation, but they require certainty in order to do so. The propensity to trade with the EU within a particular sector may also vary by region, leaving some firms more exposed than others simply depending on where they are based. Companies that are more exposed to international trade are typically sitting on investment decisions until that clarity emerges.  

Resilience in the face of adversity 

Despite the positive steps businesses are taking to become more resilient to changes, the impact of coronavirus has clearly been felt by many. SMEs owners did report turnover (66%) and cash flow (60%) to have been the most negatively impacted by the pandemic, followed by customer demand (58%) and employee morale (56%). However regardless of these challenges, many SMEs have evidently used this time as an opportunity to move towards a stronger and more successful future. 

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Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551