Resilient UK SMEs are weathering the storm caused by the cost-of-living crisis and the economic fallout from Covid-19 and Brexit, according to new research.

A survey of small business owners from across the UK, conducted by FreeAgent, has revealed the scale of the challenge facing the SME sector – with many business owners highlighting energy price rises, the lingering impact of Covid-19 and uncertainty around the UK’s future outside the EU as key areas of concern.

But despite the gloomy economic landscape, many UK SMEs say they are optimistic about their future prospects, with 76.6% expecting their business to perform the same or better in the next 12 months.

The research, which looks at the current state of the UK small business sector, shows a clear divide in the Cost of Living Crisis impact with nearly half of SME owners surveyed stating that the crisis has had little or no impact on their business, while 44.6% reported a negative impact. The report also highlights insufficient government support despite recent budget announcements and indicates a change of legislation may be needed to support UK SMEs struggling with late payment woes.

Cost of Living Crisis Divides Opinion

According to the data, the biggest negative impact on SMEs was stated as Covid-19 (15%), energy price rises (15%) and Brexit (13%). For those feeling the crunch during the cost of living crisis, when asked about what they have had to scale back on or cut from their business as a result, 41% said they had cut their marketing and advertising spend. Other areas where business owners have scaled back due to the crisis include energy use (31%), and cutting back on technology (25%) such as office equipment and software subscriptions.

However, macro-economically, nearly half (45%) of respondents said they believed the economy will worsen over the course of the next 12 months, compared to just 21% who think it will perform better than the past year. In addition, many want to see more government support implemented over the coming months to help SMEs thrive, not just survive.

Small Businesses Demand Government Support

Discussing government support, the prevailing consensus amongst SMEs is that more needs to be done – with just 9% of respondents believing that the government has provided enough support during the cost-of-living crisis and two-thirds of respondents (66%) saying they did not believe it had done so.

The survey also found that one in ten business owners believe they will have to seek additional funding in order to protect their business in the coming year. Other key areas that business owners believe they will have to focus on over the coming 12 months include keeping on top of cash flow, expanding into new products or revenue streams, reducing business overheads, getting paid faster and exploring new markets.

With this in mind, when asked what support they’d like to see change nearly three-quarters of respondents said the lowering of taxes for freelancers and small businesses would be the most beneficial. Other support measures chosen included a greater crackdown on tax evasion/avoidance by multinational businesses (51% – down from 62% in 2022), additional financial aid to help businesses through the cost of living crisis, the abolition of VAT and greater pressure on banks to lend to small businesses.

Honing in on the tax system in particular, an overwhelming majority said they believe the UK tax system should be simplified to help small businesses.

Late Payments, A Missed Opportunity

The research also found that late payment regulation is an ongoing demand for SMEs, many of whom need assistance with debt recovery. Just under a quarter of businesses said they have felt that the future of their business was in jeopardy because a client, or clients, did not pay them promptly, while 27% said they wanted to take legal action for unpaid bills (but had decided not to).

In addition, the survey reveals the extent of the late payment problem within the UK’s SME sector, with a third of business owners polled saying they have been left waiting up to 3 months to get paid by a client, while an additional one in ten saying they have waited between 6 and 12 months. Shockingly, 4% have waited between one and two years and 8% said they have had a client that never paid them at all.

The data also shows that nearly half of businesses have had to write off a sum of up to £5000 from their accounts due to non – or late – payment. With 5.5 million SMEs in the UK – making up 99% of the business population – this equates to £11.7bn of cash being written off altogether.

Roan Lavery, CEO and co-founder of FreeAgent said, “Last year, many SMEs were hopeful about surviving the impact of the impending recession, political instability, rising inflation and cost of living crisis – and now, 12 months on, we’re seeing the impact of these.

“However, while it’s positive news that our research shows small businesses are proving resilient to the turbulent economic conditions, it also highlights some key improvements that need to be made in order for them to thrive in the coming year.

“Late payment, in particular, is a real opportunity for the government to support small businesses, along with making tax simpler and helping them access much-needed funding. As the backbone of the UK economy, we need to give SMEs the tools they need to thrive, and new regulation around these issues is a key way that the government can do this.”