Are small businesses on the brink of going bust?

Are small businesses on the brink of going bust?

In a worrying sign of how small businesses are struggling, according to a recent report by PayPal, a quarter of all small businesses are so worried about their financial health that they are turning a blind eye to potential problems they might have. Worse, 12% of business owners do not expect to be in business within one year, with a further 15% unsure about their future. Indeed, the latest ONS data about business closures shows that over 137k businesses closed in Q1 2022, up 23% on Q1 2021.

It is also the fourth quarter in a row where closures have been higher than creations. In part though, this may be explained by the dramatic rise in the launch of new businesses in the last two years. In 2021, 810,316 new businesses were launched, an increase of 21.8% when compared to 2019. It was the highest number of launches on record.

These worries, stemming from a variety of reasons, include fears of rising inflation - factory input prices have increased by 18.6% over the last year, a record rise. Other worries include supply chain issues, and difficulties finding staff. All these are causing 62% of business owners to have sleepless nights, and 33% to feel alone and isolated.

According to the PayPal report, one way business owners are trying to keep their businesses going is by regularly working at weekends (44%), and more than a third (36%) will go at least six months before taking a holiday or time off, if at all.

These worries would appear to be borne out by ONS statistics. They suggest that 40%, some 2m businesses, had less than three months’ worth of cash, with the consequent potential risks to these businesses and employees. Of these 2m, the Federation of Small Businesses estimated that about 10%, or some 200k, were in serious trouble. Another 300k have potentially only a few weeks cash left before they go bust.

ons business closures

Financial woes and stress can have a negative impact on health and wellness. In tough times, staying on top of their finance wellness is a vital tool for small business owners. It needs to be a priority to minimise the personal impact of running a business, which can be an isolating and challenging experience for entrepreneurs.

Ben Ramsden, Head of SMEs, PayPal UK

Not all SMEs are gloomy

Somewhat surprisingly though, one in five said the last two years have had a positive impact on their ability to manage their finances. Research conducted by Enterprise Nation and Starling Bank reveals that 43% of the small businesses they surveyed reported that they are back to pre-Covid levels of business. Almost a third (30%) say they are "performing better than they were in February 2020".

Other businesses have stated that they have learned important lessons from the past two years and have a renewed sense of self-confidence and belief in their ability to manage their business. As well as learning from previous mistakes, 31% say they have taken steps to upskill their financial knowledge, with the result that 56% now feel more financially confident and 25% feel empowered by their leadership skills. This has led 24% to say that they have plans to grow through future expansion.