Growing pains: How to help small businesses scale

Small businesses are often described as the backbone of the UK economy. It is easy to see why. 

From corner shops to established family firms and ambitious start-ups, these small enterprises play an essential role in local communities up and down the country. 

They are also vital to the resilience of the wider economy. 

Small businesses – which have fewer than 50 employees – account for 99 per cent of UK firms and 48 per cent of all jobs. 

And during the last decade it was the smallest firms, rather than large corporations, that were the biggest drivers of economic growth. 

Why start-up numbers don't tell the whole story

The UK is home to a vibrant start-up scene. The Global Entrepreneurship Monitor survey shows that one in three adults now run their own business or is looking to start one in the next three years. 

This appears to be great news. The number of start-ups in an economy is widely regarded as a headline indicator of business growth. 

Less attention tends to be given to the proportion of those start-ups that survive or scale up to create healthy revenues and more job opportunities. 

The Enterprise Research Centre (ERC), based at Warwick Business School and Aston University Business School, has delved more deeply into the factors affecting small business productivity. 

Our extensive programme of research reveals a more troubling picture of the state of ‘small business Britain’. 

The challenges facing small businesses in Britain

Too many start-ups do not survive. Our research found almost half fail within three years, a pattern that can be traced back to 1998. 

For many of those that do survive, growth is simply not on the agenda. Only two per cent reach more than £1 million in turnover within three years. 

The scale-up rate among the UK’s small businesses has slowed dramatically during the last decade – the proportion of small firms expanding their workforce fell 40 per cent between 2012 and 2022. 

That inability to scale new business ventures sits uncomfortably alongside the record number of individual entrepreneurs we see launching their first businesses. 

The ERC’s 10th annual State of Small Business Britain report reflects on the issues that have affected small businesses in the UK during the last decade, drawing on our back-catalogue of research. 

Brexit 

Our research has found that business crises that threaten the survival of small firms are common. 

A third of small businesses reported facing a threat to their survival during the five years before the COVID-19 pandemic.  

One of the most obvious threats has been Brexit. A recent ERC study shows that a quarter of small and medium-sized enterprises (SMEs) viewed Brexit as a major business obstacle, with significant variation across industries.  

Reflecting the country’s economic difficulties, survey data shows that between 2017 and 2021, the UK exported less, innovated less, and stagnated in terms of employment. 

COVID-19 

The impact of COVID-19 was particularly severe in the UK. Exports declined more sharply than in the rest of the world, due to disruption caused by the country’s exit from the European Union. 

Small businesses were the hardest hit. ERC research showed that nearly half saw revenue fall during the pandemic; 30 per cent were forced to cut jobs; and 74 per cent reported that cutting costs became a greater priority.  

That pressure forced one in five small companies to pivot to a completely new business model. 

Rising cost of doing business 

To make matters worse, the post-pandemic years have seen the cost of doing business increase significantly, mirroring the rising cost of living. 

Our research shows the cost of doing business rose faster during the first half of 2022 than at any other time since 2008, driven by spiralling energy costs. That has created ‘locked in’ price rises.

Alongside these major shocks, small businesses have encountered numerous changes and challenges during the last decade. These include rapid developments in digital technology; growing concerns about the impacts of climate change and diversity, equality, and inclusion (DEI); and an increase in employee absences linked to mental health. 

All of this has, unsurprisingly, placed extreme pressure on small business leaders and employees. 

Ensuring a small company survives in this climate is a constant challenge, never mind aiming for growth. 

The key to scaling up small business Britain

So, what is the key to scaling up small business Britain? The ERC’s research has shown that there are several inter-related factors that influence whether small businesses grow.  

Entrepreneurial ambition is pivotal and is linked to other factors such as the educational background of entrepreneurs and their attitudes to risk. 

But access to finance, leadership skills, workplace culture, the adoption of digital technology, and innovation are also crucial. 

While the UK is strong in some areas, others need improvement. 

In particular, the current system of business support and advice is fragmented, imbalanced and patchy. There are also longstanding issues around financial literacy, access to finance, and a culture of late payment that can leave small businesses struggling to balance the books. 

UK policymakers have previously prioritised supporting start-ups and so-called ‘high growth’ firms. 

But ERC research has shown that business growth is complex and tends to come in episodes. Even the most successful businesses will not consistently maintain high growth. 

A manifesto for small business growth

A minority of businesses are engaged in growth at any one time and only a very small proportion reach significant scaling milestones. 

Thinking outside of a narrow ‘high growth’ lens can help policymakers to recognise the varied motivations of small business leaders, such as quality of life benefits and social goals.

It is time to focus on developing a more inclusive pipeline of ambitious business leaders and an environment that enables them to achieve sustainable growth and improve productivity. 

With that in mind, the ERC has created a manifesto highlighting 10 priority areas to support small business growth ahead of the UK general election. 

These provide a blueprint for a future government to strengthen the small business ecosystem and the vital contribution these firms make to the UK economy.  

1 Evidence-based policy 

We need to develop a support ecosystem that is firmly rooted in evidence about what small businesses need and what works. 

All major enterprise initiatives should be properly evaluated to identify and share good practice. 

We also support the development of a Small Business Council and opportunities for small business leaders to feed into decisions to ensure policies are rooted in real-world experience. 

2 Sustainable growth 

We need a support ecosystem that creates the right conditions for sustainable growth and improved productivity. 

Success is not all about size or the rapid growth of revenue and jobs. For example, embracing the UN Sustainable Development Goals (SDGs) can be an equally strong sign of ambition. 

Start-up policy needs to be more focused on the initial scaling process, rather than simply celebrated increased numbers of start-ups or ‘high growth’ firms, and micro-enterprises should be embraced by policy initiatives as an important source of jobs and revenue.  

3 Stable business support 

The UK needs a coherent and stable Government-funded support system for small businesses. 

Business support is currently highly fragmented and patchy and recent funding changes associated with Brexit have made the landscape even more complex. 

Running a small business may be inherently risky, but many firms do not seek business advice until they reach crisis point. We need to professionalise business support roles to prevent the loss of talent in the sector, and ensure all small businesses can access support, especially underserved groups such as female, ethnic minority, and disabled entrepreneurs. 

4 Finance 

Small businesses need to be better informed about the increasingly varied and plentiful finance options available to them. 

Our research shows access to external finance is associated with faster growth and productivity, but the options remain a mystery to most small business leaders. 

Policies need to improve financial literacy, raise awareness about the full range of options available, and improve access for disadvantaged groups such as female and ethnic minority entrepreneurs. 

5 Innovation 

We need to enable more innovation activity in small firms and address the geographical disparities that exist here. 

Grants, loans, and measures such as R&D tax credits can all facilitate innovation, while promoting collaboration can share that knowledge between firms. 

We should encourage smaller firms to seek innovation support, introduce requirements for collaboration in publicly supported projects, make university resources more accessible, and introduce devolved innovation clusters. 

6 Net zero 

Small businesses urgently need access to information and advice to help them adopt net zero practices and measure their effectiveness. 

SMEs account for half of all UK business emissions and will play a crucial role in the net zero transition. Yet only a small minority of firms currently receive support. Many lack the capability to make – or prioritise – the transition, even though they would like to. 

We need to set out the benefits of adopting more sustainable business models, develop a standard approach to measuring environmental impacts, and improve the information available to small firms at each step of the journey towards net zero. 

7 Digital adoption 

More UK businesses need to adopt digital technologies that can improve their productivity. 

Our research shows targeted support programmes and peer networking help to raise the confidence of small business leaders to adopt technology. We should develop more of these programmes. 

Digital readiness is key to adoption. Improving digital literacy so more firms recognise the benefits of digital transformation and can take advantage of technology should be a policy focus. 

8 Leadership 

We need to enhance the management skills of small business leaders to improve business survival rates and productivity and nurture their ambition for growth. This is particularly important post-pandemic. 

Encouraging more small business leaders to complete recognised management training will help them to understand what constitutes good leadership and how to evaluate their own practices. 

Policymakers should continue to invest in publicly-funded leadership programmes such as Help to Grow: Management, ensure all small businesses can access the expertise of the UK’s leading business schools, and provide small firms with free tools to build better business resilience. 

9 Wellbeing 

Small business leaders need to understand the importance of good mental health and wellbeing for productivity and improve management practices here. 

The pandemic and cost of living crisis have had major implications for the mental health and wellbeing of the workforce. Our research shows presenteeism – when employees continue to work when sick – has surpassed pre-pandemic levels and that new working practices have created challenges. 

Employers are more aware of mental health issues, but there is still considerable room for improvement, especially among the smallest firms. 

We need to provide more incentives for small businesses to regularly review mental health and wellbeing in their workplaces; improve access to dedicated training for line managers and expert advice on better management practices; and develop peer support networks for entrepreneurs.  

10 Internationalisation 

We need to encourage and support more small firms to export. There is an urgent need for policy action to address the external shocks caused by Brexit and COVID-19. 

Our research shows there are close links between international trade, ambition to grow, and innovation activity. 

Policymakers should prioritise providing more tailored advice to help firms evaluate the feasibility of exports and explore new markets, promote support for small firms, revive support for firms that have ceased exporting, and highlight success stories to inspire more innovation in exporting.  

The UK Government has already announced new measures to support small businesses, including the extension of the COVID-19 recovery loan scheme and new levelling-up packages. 

But, if we are going to improve small business growth in a meaningful way, we need more co-ordinated effort from national and local government and business organisations. 

Small enterprises may be the backbone of the economy, but they are vulnerable and fragile. Investment in a supportive business ecosystem is crucial if we want them to survive and thrive. 

Whichever party wins the upcoming UK general election, they will have a key role to play in supporting small businesses and stimulating growth.

Further reading:

The state of small business Britain: A manifesto for small business growth and productivity

Substantial rise in long-term mental health hits Midlands firms 

When should entrepreneurs trust their gut instinct?

Working on the jagged frontier: How companies should use Generative AI

Stephen Roper is Professor of Enterprise at Warwick Business School, founding Director of the Enterprise Research Centre, and Co-Director of the Innovation and Research Caucus.

Vicki Belt is Deputy Director for Impact and Engagement at the Enterprise Research Centre.

Learn more about enterprise and entrepreneurship on the four-day Executive Education course Entrepreneurship and Innovation at WBS London at The Shard.

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