Understanding the UK’s small business landscape

By Professor Ufuk Akcigit, below, Professor of Economics, University of Chicago

Small businesses play a pivotal role in fostering job creation, driving innovation, and propelling economic growth globally. In the UK, small businesses make up nearly 99% of businesses and provide 44% of all jobs. Small business entrepreneurship is part of the UK DNA. Despite their critical importance, the insights needed to fully understand the health and challenges of small businesses have been limited to date. With small businesses being much more vulnerable to the impact of rising inflation and higher interest rates this year, my team and I collaborated with Intuit QuickBooks to find out why small businesses are more susceptible to fluctuations in macroeconomic conditions.

The Intuit QuickBooks Small Business Index Annual Report is examining how small businesses are navigating the macroeconomic environment. It identifies certain factors that led to declines in small business employment in 2023, even as overall employment levels have been increasing. As well as the impact of inflation and interest rates on small businesses, the report analysis delves into the impact of digitisation and illustrates how small businesses are using digital tools such as accounting software, apps, and e-commerce to manage their business.

In this article, I’ll explore some of the report’s key findings.

Tighter monetary policies creating unique challenges

Small businesses are feeling the challenges of tighter monetary policies, particularly when it comes to securing loans, which have become both scarcer and more costly. In response, they have had no choice but to seek alternative financing options. The report uncovered a new role of credit card financing for small businesses. Before the pandemic, this usage remained stable in the UK. Yet, by the beginning of 2021, credit card usage had rebounded to pre-pandemic levels and has been on a continuous upward trajectory ever since. Presently, the accumulation of new credit card debt stands at, on average, 22% higher than pre-COVID levels among UK small businesses. This is roughly an extra £2,500 per business every month.

While credit cards play an important role, having diverse funding options would mean small businesses can reduce the risk of extra costs in today’s high-interest environment.

Limited access to funding

Access to finance is an ongoing obstacle for small businesses. For part of the report, we worked on a detailed analysis of a large new survey. When inquired about their most pressing challenges, businesses, particularly those in their infancy or owned by underrepresented groups, consistently prioritise financing as a major concern.

Overall, less than a quarter (22%) of UK respondents surveyed have received funding from a commercial lender and nearly half (48%) of small businesses in the UK are self-funded by their owners – often from working other jobs. Access to funding is critical for small business growth and the report findings indicate that its absence is contributing to less hiring. Small business job vacancies have declined in all of the first nine months of this year.

Adopting digital tools to build resilience

One of the common traits of successful small businesses appears to be widespread adoption of digital tools to run their operations. These tools vary from accounting platforms, logistics tracking, e-commerce, to their own social media channels. The report revealed that small businesses using eight or more digital tools are twice as likely to report revenue growth and four times more likely to have expanded their workforce, compared to businesses applying two digital tools or less. These correlations warrant further research to better understand them.

Digital tools help small businesses in several ways. Firstly, they can automate menial tasks and processes, reducing manual effort and in turn, improving productivity levels. This enables small businesses to streamline operations, effectively doing more with fewer resources. Secondly, many digital tools and software are cost-effective and don’t require significant upfront expense. Thirdly, these tools can be accessed from anywhere with an internet connection, allowing small businesses to work remotely and serve customers more flexibly. Finally, digital tools offer data analytics capabilities, allowing businesses to gather insights about their operations, customer behaviour, and market trends for better decision-making.

Insights for policymakers

The Intuit QuickBooks Small Business Index Annual Report has shown how small businesses are susceptible to macroeconomic shocks and have been severely impacted by high levels of inflation and interest rates. This has resulted in challenges in obtaining bank loans leading to higher levels of credit card usage as a means of survival. Small businesses often serve as early indicators of impending economic changes. Therefore, it is vital that policymakers keep an eye on this sector in real-time using modern economic indices such as our Index.

Policymakers should also acknowledge the transformative potential of digitalisation for small businesses. Investing in digital infrastructure, including high-speed internet access, is critical to future growth. Additionally, small businesses are becoming increasingly important to the UK economy, unlike the US and Canada where activity is shifting towards larger businesses. Over the last two decades, UK small businesses (20–99 employees) have increased their share of employment at the expense of the largest businesses (500 or more employees) in the economy. This makes it even more critical that policymakers and other stakeholders pay attention to the report’s findings.

We hope policymakers, industry leaders, and aspiring entrepreneurs draw valuable conclusions from our report to create policies and foster an environment conducive to the success as well as the resilience of small businesses.