There is a clear urgency for businesses to increase spending on decarbonisation, but SMEs are dragging their heels, with investment levels underwhelming. The costs involved are the main barrier. What can these firms do?

SMEs have an important role to play in helping achieve national net zero goals, not least as they represent the vast majority of the country’s businesses, but despite plenty of positive talk, action remains at relatively modest levels.

According to the new Aldermore Green Index, only 40% of SMEs have begun their sustainability transition. Tellingly, only a little over 25% of firms have “green intentions”, while a similar amount are currently assessing their sustainability targets. Less than one in ten are further along this decarbonisation process, with less than a quarter considering sustainability a key priority for the next year.

If the numbers are disappointing, there is a growing desire among SMEs to increase investment in sustainability. A recent study from Allica Bank showed a rise in the number of businesses seeking funding in order to improve their sustainability credentials. Notably, the most popular reason for firms seeking funds is to make their commercial properties more energy efficient, followed by to upgrade modern machinery and to swap to electric vehicles.

Sustainability funding and how alternative finance help

As the new data from Aldermore and Allica Bank show, there is a clear disconnect between ambition and action – and the main issue is affordability. It is hardly surprising that costs are prohibitive at a time when profit margins are increasingly thin and many small business are at breaking point.

But alternative finance can help.

Services such as invoice finance, asset finance and peer-to-peer lending are proving a vital source of capital for small businesses in a funding climate characterised by prolonged caution from traditional lenders. Indeed, the issue has returned amid highly challenging post-Covid-19 market conditions, with bank loans to SMEs falling by £14 billion in the year to March 2023.

These alternative finance facilities, which offer a more easily accessible, affordable and personalised approach to lending, are helping small businesses survive and target recovery, stability and growth. Notably, alternative lending played a prominent role in the government’s headline emergency support schemes.

This profile has helped cement the reputation of alternative finance in the business sector, with a recent study showing that more than 50% of small businesses are looking to use finance to achieve growth in 2023.

Decarbonisation investment and SME finance options

With capital resources are under enormous pressure, it is perfectly understandable that some SMEs are proving reluctant to spend more on sustainability. This transition can often involve significant change and investment. However, the need to act more quickly on climate change is clear and businesses have to find the funds for investment. This is why it is vital that owners and directors 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 Steve Bowles on 01903 602211 or steve.bowles@atbusinessassociates.co.uk.