Rising costs and tighter margins are squeezing SME cashflow – and automated underwriting doesn’t always know what to make of it
The latest Budget may not have contained a single “killer blow” for small firms, but for many SME owners and self‑employed borrowers it has sharpened a series of existing fault lines: higher running costs, tighter margins and more fragile cashflow.
Those pressures matter far beyond the business itself. When directors and sole traders come to borrow personally – especially for a mortgage – it is the health of their company’s cashflow and profit that underpins affordability. In this environment, even modest fiscal changes can change how that picture looks on paper.
Warren Abbey (pictured), CEO of 365 Finance, sees the impact from a vantage point that sits somewhere between the high street bank and the broker’s desk.
“The latest Budget has added new pressure points for SMEs and self-employed borrowers. Rising operational costs, shifts in business rates, and continued wage obligations all feed directly into cashflow and that inevitably affects affordability assessments when these business owners seek personal borrowing, including mortgages,” he says.
Resilient confidence, tight liquidity
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Abbey’s firm funds thousands of UK SMEs each year, giving him a live read on trading performance and sentiment across sectors. His verdict is cautiously upbeat on one front – and far more sobering on another.
“From what we’re seeing across the thousands of UK SMEs we fund each year, confidence remains resilient, but liquidity is tight,” he explains. “Any increase in costs or taxation tends to reduce the disposable income business owners can evidence, which has a knock-on effect when they approach traditional lenders. Many SMEs are already operating on thinner margins, so even modest changes in the Budget can influence how their affordability is perceived.”
It’s a critical distinction. Turnover may be holding up. Order books may even be growing in some parts of the country. But once rising wages, higher energy bills, business rates and tax are stripped out, there is less left at the bottom line that can be translated into mortgage‑friendly income.
That is where the Budget’s “pressure points” bite: not in a single, dramatic policy aimed at SMEs, but in the cumulative squeeze on the surplus cash that business owners need to demonstrate when they sit down with a broker.
When algorithms meet irregular income
Although 365 Finance is not a mortgage lender, Abbey says the effects of this squeeze are already visible in adjacent parts of the credit market.
“While we aren’t a mortgage lender, we sit very close to SME trading performance, and we are beginning to see caution from some finance providers in adjacent sectors,” he says. “Automated or rigid underwriting models in particular tend to react quickly, sometimes too bluntly, to fluctuations in turnover or cashflow. That’s why we believe flexible, human-led assessments (even with an AI backbone) are essential in the current environment. A strong business shouldn’t be penalised simply because its monthly revenue profile doesn’t fit neatly into an algorithm.”
For self‑employed borrowers, that critique will sound familiar. Many directors and sole traders have seen applications tripped up by models that struggle with seasonal income, lumpy contracts or reinvested profits – all of which are commonplace features of SME trading.
In a more benign environment, underwriters might be more willing to look through short‑term volatility and focus on the longer‑term trajectory of the business. But with the Budget tightening tax and cost pressures, Abbey suggests some automated systems are erring on the side of caution – and in the process, misreading fundamentally sound businesses as higher risk.
For the mortgage market, the implication is clear: as more lenders deploy algorithm‑driven decisioning, the quality of the inputs – and the willingness to override the model when it jars with commercial reality – becomes as important as the policy itself.
Bridging the gap with flexible funding
Interestingly, while Abbey sees mounting caution elsewhere, he insists his own firm has not chosen to slam on the brakes.
“In our own lending, we haven’t tightened criteria following the Budget,” he says. “Instead, we’re focused on supporting SMEs through short-term pressures with quick, revenue-based funding that can help stabilise cashflow. Many business owners are using this type of finance to bridge gaps, invest in growth, or cover rising costs so they can maintain the stability that mortgage lenders look for.”
It’s a reminder that not all borrowing is created equal. Used judiciously, short‑term, revenue‑linked facilities can act as a buffer – helping firms ride out spikes in costs, smooth cashflow between invoices, or fund the kind of small‑scale investments that keep them competitive. That can, in turn, help directors avoid the kind of erratic income patterns or emergency overdrafts that tend to alarm mortgage underwriters.
There is, of course, a fine line here. Too much leverage, or the wrong type, will harm a borrower’s prospects. But Abbey’s point is that in the current climate, access to fast, flexible working capital can be the difference between a business that presents as stable and one that appears to be permanently firefighting.
What SMEs need from policymakers now
If cashflow tools and more nuanced underwriting are part of the private‑sector response, Abbey is clear about what needs to change on the policy side.
“What SMEs need most right now from policymakers is clarity and consistency,” he argues. “Sudden shifts in tax or business rates create uncertainty... and uncertainty makes both borrowers and lenders cautious. Longer-term planning from government, combined with targeted relief for sectors facing acute cost pressures, would go a long way to improving confidence and, in turn, the borrowing prospects of self-employed and business-owner customers.”
That plea echoes a common refrain from brokers and lenders in recent months: that it is not just the level of tax and regulation that matters, but the predictability of the framework. SMEs can adapt to tough conditions if they know roughly what the rules will be over the next few years. What they struggle with is a stop‑start cycle of new levies, reversed incentives and short‑term fixes.
Keeping the backbone upright
Behind the technical debate about thresholds, algorithms and affordability lies a bigger question about the role of small businesses in the wider economy.
“SMEs are the backbone of the UK economy,” Abbey concludes. “Ensuring they can trade confidently (and that lenders across all sectors take a balanced, informed approach to risk) is essential if these business owners are to continue accessing the personal and business finance they need.”
For the mortgage market, that means looking beyond the individual application to the ecosystem that supports – or undermines – SME resilience. In a post‑Budget landscape marked by tight liquidity and higher structural costs, access to sensible working capital, human‑aware underwriting and stable policy may prove just as important to a director’s homebuying prospects as the base rate itself.
