Small Business owner holds his head as he looks at a computer screen

Hard times: Growth for UK SMEs is slowing according to the ERC's State of Small Business Report

Small business growth in the UK has continued to decline since the pandemic, and urgent action is needed if the UK Government is to meet its ambitions to boost economic growth, a new report by the Enterprise Research Centre (ERC) reveals. 

According to the ERC’s latest State of Small Business Britain report, there are 400,000 more established small and medium-sized enterprises (SMEs) in the UK since 2010, but the proportion registering any employment growth fell from 20 to 13 per cent between 2020 and 2023.  

Although the UK produces a healthy number of start-ups each year, most do not survive longer term. Only 47 per cent of the 325,811 start-ups registered in 2020 survived for three years. The 10-year survival rate for start-ups is just 10 per cent. 

The analysis also shows that only a minority of these start-ups experience high growth. Just two per cent of surviving start-ups registered in 2020 managed to achieve a £1 million turnover after three years, an oft-cited ambition of many new entrepreneurs.

Having got to a £1 million turnover, only seven per cent of established firms over three years of age then ‘step up’ and continue on a growth trajectory to record more than a £3 million turnover.   

The report also warns that there has been a marked decline in the support environment for small businesses due to a lack of consistent investment over time. 

Stephen Roper, Director of the ERC and Professor of Enterprise at Warwick Business School, said: “Small businesses are the engines of the UK economy, making up more than 99 per cent of businesses in the UK.  

“But they have faced tough times in recent years, dealing with multiple challenges, including substantial cost rises, a global pandemic and continuing economic uncertainty. 

“Although many small businesses have shown remarkable resilience, these conditions have undoubtedly had an impact on business behaviour, and the evidence shows some concerning trends. 

“One worrying trend is a marked decline in innovation activity. Given the important role innovation plays in business growth, it is crucial that this is addressed.  

“But we know that innovation requires investment, and if we want small businesses to invest, we need to raise business confidence.” 

Other key trends highlighted in the report include: 

  • Top concerns for SMEs last year included the cost of labour and materials, wider economic uncertainty, and increased competition. 
  • According to official data, 36 per cent of firms were innovating from 2020 to 2022 compared to 45 per cent over 2018-2020. 
  • The after-effects of the pandemic and business costs were the most commonly cited barriers to innovation. 
  • Employee mental health continues to have a marked impact, but smaller businesses are significantly less likely to take action to address it. 
  • Expert ratings of the UK’s entrepreneurial environment collected as part of the Global Entrepreneurship Monitor Survey have slipped from being rated ‘sufficient’ to ‘less than sufficient’. 

Mark Hart, Deputy Director of the ERC and Professor of Entrepreneurship and Enterprise Policy at Warwick Business School, said: “A lack of sustained growth among SMEs in the UK remains a key problem that the Government’s forthcoming Small Business Strategy and the associated Business Growth Service (BGS) must address. 

“It is vital that the foundation of this new service is informed by robust research evidence as well as by insights from the experiences of small business leaders themselves. 

“The UK has a diverse population of small businesses, and support needs to be focused on enabling more of them to be able to tackle the issues they face at different points of the business lifecycle. 

“We know that episodes of growth can occur at many points of the business journey, and certainly do not just begin when a business reaches 10 employees. As a consequence, the eligibility for many current growth programmes needs careful consideration. 

“Going forward we need a system of business support that better serves the realities of the UK business population, which means bringing the needs of micro-enterprises to the fore.” 

Further reading:

Growing pains: How to help small businesses scale

Small businesses backed by Start Up Loans have higher survival rates

How SMEs out-innovate big players

 

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