Small businesses:
the big picture

The challenges an SME might face and the successes it can achieve will be different for each and every business. Beyond their individual differences, location, size, and sector, they will also all have their own issues:

• An SME based in London faces competition from over a million other businesses and the lowest regional six-year business survival rate (39%) in the country – but if it succeeds it can thrive in a city that has seen 41% growth in total SME numbers since 2010 (Graph 1.3 – Appendix).
• At the same time, an SME set up in the South West of England may face less opportunities for new business, with only 24% growth in the SME population since 2010. But reduced competition and lower costs means that six-year business survival rates (46%) are the strongest in the country (Graph 1.1).
• Only 36,100 SMEs employ over 50 staff – whilst at the other end of the scale some 4.6 million of them employ just themselves as owner. Across all regions of the UK these microbusinesses, which each have between 0-12 employees, make up over 95% of the SME population (Graph 1.2 — Appendix).

• In some sectors SMEs dominate. In Agriculture they represented 90% of total turnover in 2020, in Real Estate some 74%. Yet in other sectors they are a smaller part – only 33% of UK Manufacturing turnover in 2020 came from small and medium-sized businesses (Graph 1.4 — Appendix).

This dominance is in line with broader factors and trends that we would expect to see based on the infrastructure of traditionally small business operations like farming. However, it does indicate key areas of opportunity and growth for potential SMEs where the benefits of smaller organisations, such as personal touch, supplier relationships, and bespoke services, could offer a new approach to sectors classically monopolised by larger businesses.

SMEs represent a varied, vibrant part of the United Kingdom’s economy and its society. The COVID-19 pandemic may have brought unique challenges to the UK’s SMEs, but that diversity and strength hasn’t gone anywhere.

Businesses and business leaders have had to adapt. A significant proportion (43%) began to offer new products and services during the pandemic and many SMEs started working more closely with their local communities:

• 45% of businesses agreed that helping people in need had been an important part of their business during the pandemic (Graph 2.5).
• 43% of SME business owners had a new-found appreciation for their local community and other local businesses (Graph 2.5).

Younger business owners adapted quickly and placed a particular focus on supporting their local communities — going above and beyond to help during the pandemic.

• 46% of SMEs run by under-35s had introduced new products and services — with only 40% of over-35s doing the same (Graph 2.6 — Appendix).
• 51% of business owners under 35 had focused on helping people in need as a driver of their business during COVID-19, compared to 40% of over-35s (Graph 2.6 — Appendix).

While community-mindedness and new product solutions played a part in the resilience of younger business owners, this can also be linked to the adoption and adaptation of digital solutions as well as different methods, platforms, and approaches. Whilst we do see technological upgrading across the board, this tends to be slower and more considered in relation to both older businesses and older owners, who are also most likely to take an individualistic approach.

Across the board, SMEs have innovated and adapted during the pandemic, building new support networks along the way. The same local communities they’ve been helping have responded with their own support for their local businesses — resulting in some real positives for British SMEs.

• Consumer loyalty has risen. 57% of SMEs said that more of their customers were repeat customers over the past 12 months (Graph 2.7).
• This has been driven by a significant rise in local customers — with 49% of SMEs reporting that more of their customers were from within the local community (Graph 2.7).
• Female-led businesses saw the greatest positive impact, with more local customers and more first-time customers compared to male-led SMEs (Graph 2.8 — Appendix).

Maintaining their newly founded customer relationships will be incredibly important as the recovery process for SMEs gets underway. New sources of income will drive business revenue and will help to fill the holes created by COVID-19. With over 50% of SMEs relying on the furlough scheme at some point during the pandemic, the increased revenue generated from local customers will be particularly important in supporting them when other external support measures are removed.

Greater numbers of local customers visiting the UK’s SMEs led to a boost in revenue from local sources.

• 41% of SMEs experienced a rise in revenue from local customers — only 21% saw revenue from these customers fall (Graph 2.9).
• Businesses in Financial & Business Services (48%) and Construction (45%) were particularly likely to have seen an increase in revenue from local customers (Graph 2.10 — Appendix).
• SMEs in the South West of England saw the greatest rise — with 50% reporting an increase (Graph 2.11 — Appendix).

This can be attributed to how people migrated during the pandemic, home improvement trends seen over 2020, and how they adapted to working or operating businesses from these new locations.

The South West has long been a go-to location for South East-based second homeowners, and the pandemic saw a number of these people up sticks and move more permanently to their rural retreat.

Throughout the 2020 lockdowns, we also saw more home renovations (Source: Rated People Trend Report)) and construction projects, and spending more time away from office spaces led to remote workers seeking business services in their local areas. This increased the need for various services in those areas, to the benefit of the SMEs providing them. As the UK continues to relax its restrictions, those who escaped to places such as the South West will re-evaluate where they spend their time, which could lead to another, albeit smaller, migration away from these regions back toward cities. The prospect of quarantine restrictions easing and international travel once again becoming the norm also has the potential to impact those regional SMEs who are growing to rely on staycations and city breaks.

SMEs across the UK haven’t been afraid to confront the issues facing them during the COVID-19 pandemic. Hard decisions have been made and businesses have had to adapt to the new reality, with both its upsides and downsides. Thankfully they haven’t had to do so without support.

This may be due to Brexit, which has had some impact on the ability of smaller businesses to access labour and affected domestic demand as consumers have changed location or become more focused on price and value.

Concerns amongst SMEs aren’t always universal.

Regionally there were different stories. Debt was less of a concern in the North West, where only 19% of businesses mentioned it – but fears about changes to consumer behaviour were higher than the national average. This could mean that SME owners in the North West felt confident about the financial support and business adaptations they’d utilised during the pandemic, but don’t feel those changes could sustain their business if they had to be implemented long term to account for more permanent behaviour shifts. In Scotland, where restrictions continued to remain in place throughout the easing of lockdowns in the rest of the UK, concerns over future COVID-19 restrictions were as high as 36% (Graph 6.2 — Appendix).

One difficulty SMEs holding debt will face as the economy reopens and the government withdraws support and temporary protection from liquidation, is which of their creditors to pay first. Many of those who have been affected by lockdown are likely to now owe money to a range of creditors, including their landlord, suppliers, HMRC, and their banks. Many of those who have been forced to close have seen limited revenues, but they have been legally protected from paying back any due debts. However, as the economy reopens and businesses see revenues return, they will have to prioritise which debts they repay. Increased pressure will also be driven by creditors wanting to get to the front of the queue in the belief that if they are paid immediately, they might be paid in full. Some may think that if they wait till other creditors are paid, there may not be much money left. However, if all creditors take this approach, SMEs might be unable to keep up with all the repayments, thus increasing their risk of insolvency.

Pandemic fears become less common when asking SME decision makers to look further ahead. As restrictions continue to ease and there are fewer uncertainties around living in a post-COVID-19 world, businesses face more permanent changes around consumer behaviour and ways of operating.

Debt remains a concern but rising costs of labour and other business inputs are now also common answers. Younger decision makers are particularly concerned. Over a quarter of the under-35s we surveyed spoke about the rising cost of doing business — compared to less than a fifth of older decision makers (Graph 6.3 — Appendix).

But it’s not just challenges that SMEs see on the horizon. There are opportunities too (Graph 6.4):

• The return of clients is the main opportunity decision makers are hoping to benefit from over the next three years – with more than a third of those we surveyed picking this answer. More established firms were particularly likely to select this option.
• A fifth of businesses believe that new technology will bring efficiencies in the near future.

The changes businesses have had to make during the pandemic have also opened up new opportunities (Graph 6.5):

• New ways of working, including homeworking, are seen as an opportunity for growth by 27% of SMEs.
• New domestic clients and the chance for expanded local business figured in 26% of answers.
• The introduction of new types of goods and services were mentioned by 23% of respondents.

SMEs are uniquely placed to take advantage of these opportunities. Their adaptability and flexibility will allow already established businesses to grab chances wherever they turn up. We’re also likely to see a whole new generation of SME decision makers crop up – supported by local communities with strong links to their local businesses.

Looking at past trends amongst SMEs it’s possible to make some predictions as to the sectors in which small-to-medium sized businesses might see the best opportunities going forward.

• Microbusinesses in the Information and Technology sector are a key example. They saw strong pre-pandemic growth – turnover rose by 79% between 2010 and 2020 (Graph 6.6 — Appendix). They’re now uniquely placed to take advantage of changes in where and the way in which the UK goes to work, helping businesses and employees adjust to new technologies.
• In Retail & Wholesale, larger SMEs have continued to be efficient during the pandemic. Despite making up 46% of total sector employment in 2020, they contributed 52% of turnover, likely due to shifting focus to online selling (Graph 6.7). With customers returning to stores they should be in a strong position to make the most of pent-up and new demand.

In previous recessions SMEs have bounced back the strongest in London. It’s likely that Britain’s largest city will see similar growth in its SMEs in the years ahead – but success might not be so centred around the capital this time.

London’s businesses have suffered a lot during the pandemic and may take longer to recover. At the same time SMEs in other regions of the UK, like the South West and East of England, which have historically had higher business survival rates, may have been able to weather the storm. With the government keen to support levelling-up in regions outside the capital, there should be support for business in need across the UK.

This increases the likelihood of a more equal recovery, although it won’t be plain sailing for Britain’s SMEs. Yet despite the difficulties they’ve faced during the COVID-19 pandemic, opportunities do lie ahead. What’s important is making sure every SME has the chance to flourish when those opportunities arrive.