Tough conditions for small businesses?

Tough conditions for small businesses?

More than 15 years ago the Bank of England commissioned a series of reports on finance for small firms[1]. The combined reports, part of a bigger ten year program of research, came to some unsurprising conclusions. They are as relevant today to the tech start up, Deliveroo rider or AirBnB house owner as they were in the early naughties before the Global Financial Crisis.

The contribution by small business enterprises (SMEs) to the UK economy was astonishingly dominant: more than 54% of the gross value added to the economy, nearly 40% of the net capital spending and in many sectors SMEs outperformed in productivity larger so called efficient worlds best practice firms. One of the “unknowns” was the perennial life cycle of SMEs with insufficient data on why so many close given that the clear majority are not “business failure or insolvency”. We still do not have the statistics to better inform policy makers and civil society commentators as to the decisions why SMEs come to an end.

It is possibly no surprise that productivity in construction, wholesale and retail, hotels, restaurants, real estate and renting, health and social work sectors showed SMEs were better users of capital and labour. The labour productivity of businesses with 100-249 in nearly all sectors exceeded that of large firms – saying something about classic assumptions about economies of scale.

Small firms tend to net providers of trade credit and rely upon a mix of overdraft and invoice financing to keep cashflow operating. Small firms, in the absence of specific tax or policy initiatives, tend to be cyclical in their use of leasing or hire purchase. Venture capital in the pre crowdfunding era played a modest to negligible role for SMEs. The take home view that bank lending and financial institutions were serving the needs of SMEs was strongly argued by the banks themselves and borne out by data. But the figures suggested that SMEs were cautious about banks and at times ensured that they built up capital rather than attempt to access lending.

The Campaign for Better Business Statistics (showcased by UKPLC in its research outreach) is mindful that the past offers only a limited window of insight into today’s issues. But is it interesting that central government, the Bank of England and key Whitehall players were looking at the barriers to finance for small business during a period of better rather than worse economic conditions.

Getting the right data in this data rich environment to determine not only what business operators decide but what their consumers, employees and contractors think about the state of play is essential.

If you would like to comment on this blog or enquire as to how you or your organisation can contribute to ongoing research projects, please make the effort. The lessons from before the global financial crisis, austerity and Brexit challenges still ring true: SMEs are the lifeblood of the British economy and often the strongest candidate for raising productivity and living standards – from Redcar to Rye, from Spitalsfield to Stirling.

by Noel Hadjmichael, CMR Group


[1]Finance for Small Firms” published by the Domestic Finance Division of the Bank of England,  April 2003

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