Brexit, COVID-19, and domestic factors have all had a major impact on the UK economy, with UK small businesses on the front line.
However, these external elements have also forced UK small businesses to become nimble and adapt to the challenging environment.
In this article, we will explore some of the factors that have impacted UK small businesses over the last few years and offer practical advice for small businesses to implement.
Rising Costs and the Impact of Inflation
It’s no secret that costs have risen for consumers, and this is largely due to increasing costs for UK businesses. In 2023, the UK inflation rate peaked at 11.1%, the highest in over 40 years, according to the Office for National Statistics (ONS). Rising inflation has driven up the cost of goods, services, and energy, placing more pressure on businesses.
How does inflation affect small businesses?
- Increased Operating Costs: Business energy prices in the UK have increased by a staggering 250%. Combine this with the rising costs of raw materials, staff, and utilities, and businesses are left with little choice but to increase prices.
- Reduced Consumer Spending: As the cost of goods and services rises, consumers are left with less disposable income. A £1 today doesn’t stretch as far as it did before, and we’ve all noticed getting less for our money.
A survey by the Federation of Small Businesses (FSB) reported that over 77% of UK small businesses experienced higher costs in 2023 compared to the previous year.
TIP: Small businesses should consider renegotiating with suppliers to manage rising costs and explore digital tools to streamline operations.
Rising Interest Rates and Barriers to Borrowing
In response to high inflation, the Bank of England (BoE) raised interest rates, which peaked at 5.25% in 2023. This made borrowing money more expensive, with both positive and negative consequences for businesses.
How do rising interest rates impact small businesses?
- Increased Loan Repayments: For businesses with variable-rate loans, repayments have risen significantly, which can negatively affect cash flow.
- Reduced Access to Borrowing: With increased caution from banks, small businesses may find it harder to access credit, limiting their ability to invest or fund new projects.
According to the British Business Bank, 42% of small businesses are struggling to access the finance they need to grow due to rising interest rates.
TIP: Consider alternative financing options like government grants, crowdfunding, or peer-to-peer lending. Tightening credit lines with customers may also help improve cash flow.
Brexit, the Pandemic, and Supply Chain Disruptions
The UK has faced significant challenges in recent years, from Brexit and COVID-19 to geopolitical tensions, including the war in Ukraine. These factors have caused supply chain disruptions for UK small businesses, resulting in delays, shortages, and increased shipping costs.
How do global events like pandemics impact small businesses?
- Longer Delivery Times: Many businesses are facing delays in deliveries, affecting their ability to meet customer demand and maintain stock levels.
- Increased Costs: The cost of shipping products to the UK has soared, largely due to rising oil prices and other economic factors. Container pricing is significantly higher than pre-pandemic levels.
According to a report, 60% of UK manufacturers have experienced supply chain disruptions, which has had a knock-on effect on small businesses.
TIP: Small businesses are turning to local suppliers and using multiple vendors to ensure stock availability and meet demand.
Shifts in Consumer Behaviour
When COVID-19 hit, many of us turned to online shopping, socializing, and interacting with the world. Small businesses that didn’t adapt quickly struggled to retain their customer base. Today, the shift towards a more digital world continues to affect businesses.
How do changes in consumer behaviour impact small businesses?
- E-commerce Growth: Consumers are now ordering everything online, from coffee to gazebos. Small businesses must offer digital solutions like websites, apps, or online payment systems. Your customers are online, so your business should be too.
- Changing Spending Habits: Consumers are becoming more selective, prioritizing value for money over other factors.
According to eMarketer, UK online sales are expected to reach £177.11bn in 2024, the highest since 2021.
TIP: Invest in improving your online presence, optimize your website for mobile, and offer a personalized customer experience. Digital marketing strategies can help expand your audience base.
Labour Shortages and Wage Increases
Brexit and COVID-19 have contributed to a smaller pool of available workers, pushing wages higher. Industries such as hospitality, retail, and construction have been particularly affected.
Despite this, UK unemployment currently stands at 1.39 million.
How do labour market issues impact small businesses?
- Higher Wages: Small businesses are forced to offer higher wages to attract and retain employees, further increasing operational costs.
- Skills Shortage: It’s essential to hire staff with the right skills to get the job done effectively.
The Office for National Statistics reported that there were 1.2 million job vacancies in 2023, with many small businesses struggling to fill key roles.
TIP: Invest in your employees and offer flexible working conditions to retain staff and grow your business.
Summary
Despite the economic challenges, businesses can and do adapt. By responding to consumer behaviour shifts, managing supply chain disruptions, and embracing digital tools, small businesses can not only survive but also thrive in a changing landscape.
Focus on innovation, operational efficiency, and using technology to attract and engage customers to stay ahead.
