Business insolvencies are on the rise and more than half of small firms expect to stagnate, shrink or fold in the coming year, according to a new poll conducted by the Federation of Small Businesses.
The latest quarterly Small Business Index, published by the Federation of Small Businesses (FSB), has found that the majority of small firms expect no growth or negative growth in the next year. It says cost pressures and labour shortages are stymying investment plans and hampering economic development.
Together, the number of small firms that predict they will stay the same size (38.7%) or downsize or even close their business (14.7%) has reached 53.4%, leaving less than half of SMEs (46.6%) predicting that they will grow in the coming 12 months.
The results differ by sector, with a better outlook for businesses in the information and communication sector, where 63% of businesses expect to grow, compared with only 34% of wholesale and retail firms and 35% of hospitality sector businesses.
Rising prices
Unsurprisingly, inflation is affecting the vast majority of firms, with 89% saying their costs are higher than a year ago. Fuel (cited by 64%) and utilities (63%) were the most-mentioned causes of this increase in costs, both up notably from the first quarter and far higher than this time last year.
Lack of access to skilled staff is also a significant worry, described as a limiting factor by 34% of businesses which expect to grow. Q2 2022 saw more small businesses reporting a fall in employee numbers than growing their payrolls, the first time this has happened since Q1 2021. One in ten small businesses grew their number of employees over the previous quarter, but were outnumbered by the one in seven that saw staff numbers fall over the same period.
Martin McTague, FSB national chair, said: "A healthy business ecosystem requires businesses of all sizes to be able to realise their ambitions - from one-person start-ups with a great idea, through the small and medium-sized businesses which form the bedrock of the economy, right up to the largest companies, who rely on countless smaller suppliers and service providers.
"Inflation is higher than at any point for the last four decades, and is also acting as an inhibitor to investment - machinery, parts, software, tools, rents, and employment and operating costs in general are all increasing in price more rapidly than small businesses can run to keep up. It's a toxic recipe for the future health of the economy.
"If the next government wants to be able to level up the country, small business considerations must be at the heart of its thinking. Our members are looking for concrete help."
Rising insolvency levels
July's government Insolvency Service data shows that corporate insolvencies are up 67% compared to the same month last year (1,827 in July 2022 and 1,096 in July 2021). Current levels are also 27% higher than they were before the COVID pandemic.
The increase is primarily driven by Creditors' Voluntary Liquidations (CVLs), where directors have chosen to place their business into an insolvency process. In July 2022, there were 1,609 Creditors' Voluntary Liquidations (CVLs), 60% higher than July 2019.
Commenting on the news, Oliver Collinge from insolvency practitioner PKF GM said: "Alarm bells ring when there is a material increase on pre-pandemic levels, as we are seeing now. Many distressed businesses managed to keep afloat through COVID by using the high level of government support available. Most businesses are now repaying BBLS or CBILS loans and many are also still repaying HMRC liabilities deferred during the pandemic, and rising input costs are adding to these cash flow pressures.
"The current headwinds will create challenges even for better-performing businesses, not only those that were already in survival mode … Pressure on cash continues, and unfortunately, we expect to see heightened levels of business failures for some time to come."
Written by Rachel Miller.