Constant restrictions and national lockdowns in most countries have made it almost impossible for many businesses to stay afloat – and that does not factor in other political changes that have caused great cost and impact, such as Brexit.

Loans, whether it was government support schemes or conventional consumer credits, have been the only way out of what seemed like a hopeless situation for many. Our recent study across seven European markets showed that more than half (52%) of SMEs had to apply for a loan of some sort to survive 2020. The number of SMEs that needed loans to get through the pandemic was particularly high in Finland (60%), Sweden (58%), and the UK at 56%.

Most popular loans among SMEs

Many governments spotted the seriousness of the situation incredibly early on in the pandemic and offered various schemes with immediate effect to help businesses through the various national lockdowns. We found that 31% of European SMEs applied for these government support schemes, with the likes of the Coronavirus Business Interruption Loan Scheme in the UK and the ‘Corona Soforthilfen’ in Germany, being some of the most attractive choices.

The most popular source of funding, however, was retail financing, a form of loan set up to pay back in instalments to those with good credit ratings, which was the number one choice for more than half (55%) of small and medium businesses in Europe.

However, research also showed that one size didn’t fit all. One in five SMEs relied on credit cards (21%) and 11% turned to online loan providers, while a quarter of SMEs (24%) had to turn to the most traditional of funding, asking family or friends for financial support. This shows that when it comes to loans and schemes, variety of sources is key.

What was the money spent on?

For most SMEs, the loan they received was used to cover the most basic needs, with 35% of respondents stating that the money was used to pay overheads, and 13% said they had to use the money to pay wages. These results showed the urgency for funding during the pandemic to keep businesses up and running.

The one thing the pandemic showed businesses was the need to be agile and innovative to survive to keep up with new consumer and employee demands. We discovered that in fact, one third (33%) of European SMEs used the money to invest in technology. With shops closed, and our everyday lives going virtual, the switch to technology was necessary for most businesses, and this was realised the most by SMEs based in the Netherlands, with 41% of Dutch SMEs investing in this area of their business.

Another area of investment was talent acquisition. One in five SMEs (21%) used their loans to hire talent to better equip them for the challenges ahead and potentially the change in practices.

Confidence in positive changes

Despite the challenging situation, our research has also shown that many SMEs were quite optimistic about the future. More than half of SMEs (57%) were confident that 2021 will bring positive change, and that most economies will recover to pre-Covid levels within the next two years. 51% of SMEs, in fact, believe that their own business will recover within this year.

Optimism for the new year mainly comes from the agriculture sector (60%), the real estate industry (58%), business services (55%), and food & drink (55%). As hospitality hopefully looks towards a new normal later this year, 52% are confident of their business recovery in 2021.

A brighter future

The pandemic has left many businesses, especially SMEs, in financially dire straits. Many struggled to cover basic outgoings, and for most, the only way out of a very difficult situation has been to secure a loan. But SMEs – as the backbone of many economies – are confident about the future, and their own business recovery.

As small and medium businesses look toward a road of recovery, it is critical that the right financing is available to help guide them to growth. From government support to alternative lending, they need to feel confident in their recovery. 2020 has tested SMEs’ ambition, motivation, and resilience like never before, and in times like these, it is vital that the typical funding gap we find between traditional lending from banks and small businesses is non-existent. Governments must look at widening options for SMEs into the alternative lending space as we close that gap, providing a quicker turnaround in getting funds into their banks.