With COP31 just days away, business investment in reducing energy consumption is back in the headlines. Despite a clear commitment, spending from smaller firms remains underwhelming. How can they balance investing more with protecting working capital?

What is behind small firm reluctance to spend more on green development?

According to new research from Sage and the International Chamber of Commerce, while smaller businesses are keen to invest in renewables and achieving greater energy efficiency,  spending in key areas remains limited, in particular with regard to reducing Scope 3 emissions. This is despite the major contribution that smaller firms make to carbon emissions and the importance of sector action in helping to achieve national climate targets.

The report puts the blame firmly on the costs involved. It reveals that while green finance applications have surged by over two thirds over the last three years, the proportion of SMEs actually receiving loans has barely changed, and that despite their green ambitions, almost two thirds of businesses prioritise product and service affordability.

Notably, a similar amount of firms cite high upfront costs as the main barrier to upping investment in reaching net zero. This tallies with research from CRIF and figures from the Federation of Small Businesses, which show that a significant number of firms are hesitant about spending because of concerns over return on investment or a lack of capital.

Going back to the Sage and the International Chamber of Commerce data, interestingly, it shows that four out of five small businesses that consider green financing never submit an application because of complex requirements and information gaps. This suggest the need for greater education around the subject, the responsibility for which partly fall on firms, which represents another cost.

How alternative lenders can help with SME decarbonisation investment

The new research on small business investment in decarbonisation is a timely reminder of state of spending in this sector, but it is hardly surprising to learn that smaller firms are proving reluctant to invest on a greater scale. The current economic climate and the pressures on small firms represents a serious obstacle to investment, in any type of development, including reducing energy use.

However, development is only moving in one direction, not least with larger companies increasingly demanding stronger ESG profiles from smaller businesses in supply chains. As such, the pressure is on for smaller firms to increase spending.

To do so, access to finance is critical, but with traditional banks continuing to be cautious with regard to small business lending, this is proving far from straightforward. This is where alternative finance facilities can help.

In response to the squeeze on lending, alternative finance has become into a vital lifeline for small firms. Solutions such as invoice finance, asset finance and peer-to-peer lending are filling the funding gap, offering speed, affordability and tailored support.

Notably, the Growth Guarantee Scheme is providing a wide range of finance facilities to smaller firms, including invoice finance, and there has been calls for the initiative to be expanded significantly to help smaller businesses struggling to access finance. Such development offers further proof that alternative lenders are increasing filling the small business funding gap.

Small business options for financing green investment

It seems clear that the major challenge in terms of getting small businesses to increase spending on decarbonisation isn’t a matter of convincing them that it is the right thing to do; rather it is a question of affordability and access to finance.

Given the economic headwinds that firms are facing, such hesitancy to invest is understandable, but at the same time, there is a growing urgency around the need to spend more, both on a micro and a macro scale. This is why, with traditional lenders remaining cautious, it is important that key-decision makers are aware of all the finance options available to them, including the services of alternative lenders.

To find out more about A&T Business Associates services, contact Tony Hedger on 01903 602211 or tony.hedger@atbusinessassociates.co.uk.