United Kingdom / Coronavirus Insights
How disruption from COVID-19 is affecting SMEs

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by Pavlos Petropoulos, Industry Analyst
Jun 30 2020

Small and medium-size enterprises (SMEs) are the backbone of the economy, accounting for 99.9% of the 5.9 million businesses in the United Kingdom in 2019, according to the Department for Business, Energy & Industrial Strategy . SMEs have taken a severe hit during the COVID-19 (coronavirus) pandemic, with many ceasing to operate due to insurmountable costs and depleted cash reserves. According to Organisation for Economic Co-operation and Development Policy Responses to Coronavirus, 69% of UK SMEs are experiencing serious cash flow problems, with 35% fearing they will not reopen again, despite support from the UK government through grants, emergency business loans and the Coronavirus Job Retention Scheme (CJRS). Governments across the globe are pumping money into the economy in the hope of stimulating demand. Many SMEs in the United Kingdom have been forced to leverage their business in a bid to survive the pandemic.  Although excess debt levels provide a temporary solution to the problem, the survivability of SMEs in the long term and the recovery rate of the economy will depend on whether there is a second wave of infections, if and when an effective vaccine becomes available, and the extent to which productivity and entrepreneurial activity will grow.

On 23 March 2020, the UK government announced the closure of non-essential businesses in a bid to tackle the spread of the virus. That is when SMEs really started to feel the impact of the coronavirus pandemic. According to the Office for National Statistics’ (ONS) Business Impact of COVID-19 Survey (BICS) for the period between 23 March and 5 April 2020, 81% of businesses in the accommodation and food service industries and 82.2% of arts, entertainment and recreation companies temporarily closed or paused trading following the announcement. Overall, 26.2% of UK businesses with fewer than 250 employees temporarily closed or paused trading during this period.

The government-imposed closure of non-essential businesses is expected to have left SMEs scrambling with mounting rent and debt servicing costs while unable to generate much revenue. According to the Bibby Financial Services COVID-19 Pulse Survey of 500 UK SMEs, approximately a third of SMEs believe they will only be able to meet their business costs until July and 75% have stated that they will not be able to maintain costs for more than 12 months. According to a report conducted by small business insurer Simply Business, the coronavirus outbreak will cost SMEs across the country £11,779 each on average in lost work, earnings, and loan repayments. To make matters worse, a quarter of UK SMEs have incurred bad debt, writing off an average of £34,500. To mitigate this trend, the UK government introduced the Small Business Grant Fund on 1 April 2020 to support small and rural businesses in England with their operational costs during the pandemic. However, this £70,000 one-off cash grant is only available to businesses that occupy property and are eligible for small business rate relief, leaving many SMEs unable to access it.

These challenges left SMEs eager for any type of government support they can get. On 20 March 2020, the UK government introduced the CJRS, a scheme through which the government reimburses 80% of furloughed workers’ wage costs to a cap of £2,500 per month in a bid to avoid mass layoffs. According to the ONS’s BICS for the two-week period from 23 March to 5 April, 83.3% of UK businesses with fewer than 250 employees made use of the scheme as soon as it became available, compared with 76.4% of businesses with 250 or more employees, indicating that smaller businesses were in more dire need of financial support.

On 23 March, the government introduced the Coronavirus Business Interruption Loan Scheme to help SMEs access loans and other finance instruments with a value of up to £5 million. However, loans from the scheme failed to be deployed fast enough by banks to support struggling firms, according to The Guardian in mid-April 2020. This resulted in the introduction of the Bounce Back Loan Scheme on 27 April 2020 to enable SMEs access finance more quickly during the coronavirus outbreak. Though government support has slowed the bankruptcy rates of SMEs, whether SMEs will be able to afford the interest payments of these loans will very much depend on how quickly demand recovers. In turn, this depends on whether there will be a second wave of infections and if and when an effective vaccine will become available.

The hospitality sector has been one of the hardest-hit by the coronavirus pandemic both in the United Kingdom and across the globe, as it is associated with large gatherings of people and travel.  The Holiday Accommodation, Full-Service Restaurants and Pubs and Bars industries have been some of the hardest hit. Although most hospitality businesses are expected to reopen from 4 July, most operators are anticipated to operate under capacity due to social distancing guidelines restricting the number of customers that can be inside the premises at any given time. Generally, SMEs are in a worse position than large companies due to the inability to access cash reserves from high net worth shareholders. For example, according to the ONS BICS for the period between 6 April and 19 April, 7.9% of businesses with fewer than 250 employees reported that access to finance has decreased whereas only 6.7% of businesses with 250 employees or more reported the same.

Large companies also have more assets to sell and leverage to access debt. However, the sheer scale of large companies can also prove to be a disadvantage in a hard-hit sector, as tumbling demand can have an irreversibly devastating effect on profitability, driving them to liquidation. Moreover, SMEs have the ability to more easily adjust their offerings in line with shifting demand, which has been beneficial to some firms during the pandemic. According to Business Matters in June 2020, 43% of businesses surveyed launched a new product, service or revenue stream as a result of the coronavirus, with 68% of these relating to innovation of existing products or services and 6% in an entirely new area.

Despite its significant negative impact on many businesses, the coronavirus outbreak has lifted the entrepreneurial spirit of SMEs. SMEs have been quickly adapting to increased demand for online shopping, with the Barclaycard SME Barometer showing 17% of SMEs have boosted social media activity and 11% have increased their focus on online sales to continue reaching their audiences. The shift to online channels has been gaining momentum for years, but the rapid spread of the coronavirus has accelerated this trend. Nearly 20% of SMEs are also planning more for the future, a trend that is essential to recover from the pandemic through an increase in productivity. Additionally, according to traffic to Enterprise Nation, people searching for information on how to start a business surged by 67% between late-March and late-April. This trend has been driven by employees being worried of losing their job and looking to establish their own businesses as a result. Entrepreneurship in this time of crisis could be key to the UK’s economic recovery, as starting a business has the potential to increase employment, productivity and the value added to the economy by an individual.

To sum up, SMEs have been hard hit by the coronavirus pandemic. Heightened rental and debt costs have driven many businesses towards loan schemes in a bid to survive the crisis. The government’s CJRS scheme has also been essential to ensure that mass layoffs are limited and the adverse impact of the coronavirus pandemic is minimised in the short term. Hospitality has been one of the hardest hit sectors due to its activities being associated with large gatherings of people and travel, two of the things that must be avoided to tackle the spread of the virus. However, the pandemic has also resulted in a growing number of people looking to start their own businesses and small businesses looking to better target their customers, both of which are expected to support the UK’s economic recovery. However, the rate of recovery will also depend on whether there will be a second wave of infections and how quickly an effective coronavirus vaccine will become available across the country.


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