7 February 2024 – Small business growth in the UK has stunted over the past decade, new research has shown.
The Enterprise Research Centre‘s (ERC) comprehensive report compiled data from ERC studies and other secondary sources. It turns out the last ten years were a period of challenges for small businesses in the UK.
Based on numbers alone, there is a notable increase in the small business population. Of an estimated 4.9 million private sector businesses registered in 2013, 99.9% were SMEs. Jump to 2023, and 5.53 million SMEs currently employ 13.1 million people or 48% of the total employment in the UK.
This influx is due to increasing interest in starting a business. At 12% of Global Entrepreneurship Monitor survey participants, the number is double that of the previous decade.
Despite record-breaking registrations of first-time business owners, there is an alarming decline in new and established ventures engaging in high-value activities. After three years of trading, a consistently meagre 2% of surviving start-ups can achieve a minimum of £1m in revenue.
So, what’s been holding back UK SMEs in the past ten years?
SMEs refrained from external finance, innovation, and exporting
The results from a series of 2015-2018 Longitudinal Small Business Surveys disclosed that most firms’ decision-making revolved around a decrease in seeking external finance. Several factors, such as uncertainty and risk, prevented businesses from further investing in growth and allocating funds to business support.
Meanwhile, the recent 2019-2022 survey illustrates how businesses evolved due to the COVID-19 pandemic.
Businesses shied away from growth-related behaviours in 2022 compared to 2019. For instance, product or service innovation fell from 33.1% in 2019 to 29.5% in 2022.
Entrepreneurs were understandably more interested in keeping businesses afloat despite deficits during lockdowns. Exporting also fell to the back burner, from 22.8% in 2019 to 18.9% in 2022.
A notable disconnect existed between projected sales growth and actual numbers in the succeeding year. Of the participants who reported growth before the initial 2019 survey, only 18.1% managed to foster employment growth during the next four years.
In other words, the pandemic was a period of survival rather than innovation for most businesses.
Cash reserves, risk insolvency, and late payments among top SME liabilities
Small businesses don’t have sufficient financial safety nets compared to their larger-sized counterparts. A 2023 Business Insights and Conditions Survey measured financial health by examining cash reserves.
The survey determined that the highest concentration of entities with no cash reserves lies among micro-businesses with 0-9 employees, followed by small businesses with 10-49 employees.
The divide between medium and large enterprises versus SMEs is further observed in this context. Less than one in three small businesses estimate their cash reserves to last beyond six months compared to 40% of larger enterprises.
Risk insolvency was highlighted as a potential risk to SMEs. Cost increases in the first six months of 2023 were at their highest since 2008.
Recent price hikes massively affected small business growth and forced 38.7% to absorb costs. 19.9% had to pass additional costs to customers, while 8.9% changed suppliers.
5.1% needed to seek financial support, and 3.4% reduced staff work hours. Others turned to discontinued lines (2.1%) and scaled-down workspaces (1.7%) to minimise the implications of price increases.
Another issue that affects small business growth is late payments, which results in significant cash flow issues. According to Xero Small Business Index data, late payments hit a three-year high in the autumn of 2023.
Falling demand and COVID-19 influence current business concerns and trends
The various trends in business concerns help determine the shift from one economic context to another. For example, the top concern of October last year was the falling demand for goods and services.
14.1% of businesses felt the effects of consumers watching their pennies due to the rising cost of living. Other top concerns were energy prices (11%) and inflation of goods and services (12%).
Many businesses reorganised and turned to remote and hybrid working during the past four years. Post-pandemic, 18.9% of UK businesses consider homeworking a permanent option.
As lockdowns lifted, hybrid working became more common. 22% of SMEs and large companies have staff working from home one to two days a week.
Help to Grow campaign launched to help UK SMEs exclusively
2024 is the year of the SMEs, according to the government. And with that, an improved Help to Grow campaign was launched to foster small business growth.
A website will compile resources aspiring entrepreneurs need to succeed, such as a step-by-step guide on setting up a business.
Help to Grow management courses will also be available for SMEs. The 90% subsidised scheme is a 12-week programme that helps improve leadership and management skills.
A new Small Business Council will also launch next month. With SME leaders at the forefront, the council will be the voice of small businesses nationwide.
From Brexit to the pandemic, SMEs became a major economic player by overcoming the UK’s unique social and political backdrop. Hopefully, the Help to Grow campaign will provide a stable support network for small business owners.
There is no doubt that the past few years have been tough for small businesses and many haven’t made it through. But the challenges haven’t stopped.
Brexit is still posing challenges, not just for those small businesses that export the EU. Border checks and additional documentation and costs make trading with the block more difficult and costly.
Prices are still high, even if inflation is slowing down. High interest rates make borrowing more expensive and, for some, not viable.
A labour and skills shortage makes it difficult for small businesses to find the right staff. The government might see 2024 as the year of SMEs, but that doesn’t seem to translate into support.
The Help To Grow campaign might have some positive aspects, but it won’t help SMEs to overcome the many challenges they are facing.
Small business growth will continue to be slow, unless there is real support in place.