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Small and medium-sized businesses are the backbone of the UK economy. They account for 99% of all British businesses and are more varied than you could imagine.

But despite the huge number of small businesses out there, more than 5.8 million at the last count, life can be hard. They have to deal with all the challenges faced by larger organisations but without the added security provided by scale. That can leave small businesses dangerously exposed to the fluctuations of the wider economy, increasing competition, changing customer preferences and much more.

In this guide, we’re going to explore the top challenges small business owners will face in 2020. That includes challenges experienced by businesses of every size, such as the uncertainty surrounding Brexit, as well as some that are unique to small businesses.

How Many Small Businesses Fail?

It’s often said that half of all small businesses fail in their first year. However, the latest figures from the Office for National Statistics show that’s not necessarily the case.

business failure rates in 2020

In fact, of the 672,890 new businesses registered last year, that’s the equivalent of 70 new businesses every hour, 91% can still be operating in certain industries after the first year. However, fast-forward five years and just 40% will still be trading.

Small businesses fail for many reasons. Some just don’t pass the market test. There’s no way to shield small businesses from competitive forces, and given the constant cycle of innovation, risk-taking and creative destruction, it’s not surprising that many ventures fall.

However, many other businesses fail due to circumstances that could have been avoided if they had been identified early and properly managed.

Top Challenges for Small Businesses in 2020

(1) British Businesses are Wary of Brexit

The next struggle small business owners expect to face in 2020 is the post-Brexit impact. According to a YouGov survey, 39% of small business owners think that exiting the EU will leave their business worse off, while just 10% believe they’ll be better off.

The survey shows that entrepreneurs in London are the most likely to have concerns for their business post-Brexit. Nearly half (49%) think their businesses will be worse off overall once we leave the EU, followed by 47% of business owners in Scotland and 44% in the south west of England.

financial impact of Brexit on UK Struggling Businesses

The level of concern business owners have also varies depending on the sectors they operate in. 47% of small manufacturing businesses feel they’ll be worse post-Brexit, followed by 45% of retail and 42% of hospitality business owners.

Those in the professional services sector are the most bullish about their post-Brexit prospects, with 57% of legal firms and 52% of accountants saying they will not be affected.

With many business owners believing they’ll be worse off after Brexit, there will inevitably be an impact on business insolvency rates. Figures from Euler Hermes forecast business insolvencies will rise by 9% next year in the event of a ‘soft Brexit’, and increase by 20% if there’s a ‘hard Brexit’.

hard vs. soft impact financial impact

(2) Cashflow is Still the Biggest Concern

Cashflow is a perennial concern for small business owners and it will continue to be their greatest challenge in 2020.

According to the recent Small Business Trends report from Guidant Financial, 33% of more than 2,700 respondents said that cashflow was a problem for their business. That’s despite the fact that 78% said their businesses were currently profitable and 53% ranked their happiness with their current situation as 9 out of 10 or higher.

cash flow problems for UK business owners

No matter how profitable a business is or how many assets it has, without cash, there is no business. You will not be able to cover major recurring costs like rent and payroll, pay business tax, fulfil supplier invoices or purchase supplies and equipment to maintain your operations. Effectively, the business will be strangled.

Cashflow issues can be caused by factors such as falling sales, high levels of spending and a lack of rigorous cashflow management, but it’s late payments from clients and customers that are the leading cause of cashflow problems in the UK.

According to the latest figures from the BACS payment scheme, 54% of small businesses are currently experiencing overdue payments, which is the highest level since 2015. The average late payment debt burden has increased to £25,000 per company, with SMEs reporting that a debt burden of £35,000 could jeopardise their business.

The UK government has introduced Payment Practice Reporting, which requires large organisations to report on how quickly they’re paying their suppliers in their annual accounts to expose poor payment practices. Small businesses are using this publicly available data to determine who they supply to, and this could help them overcome the challenge posed by late payments in 2020.

(3) The Threat of Cyberattacks Continues to Grow

Cyberattacks occur every second, of every minute, of every hour, of every day, and, if you run a small or medium-sized business, you’re a prime target. According to the latest figures from the Federation of Small Businesses (FSB), small businesses in the UK are collectively subject to nearly 10,000 cyberattacks a day, with the cost of these attacks estimated at £4.5 billion a year.

UK small businesses have been subject to 530,000 phishing attacks, 374,000 instances of malware, 301,000 fraudulent payment requests and 260,000 cases of ransomware over the last year. Small businesses are particularly susceptible to cyberattacks because they:

  • Lack sufficient security measures and trained personnel
  • Hold sensitive data that could be valuable to hackers (credit card numbers, protected health information, etc.)
  • Do not use third-party services or an off-site source to back up their files or data
  • Connect to the supply chains of larger organisations and can be used as a way to break in

The FSB has put the average cost of a UK cyberattack at £1,300, but even breaches that do not cause financial consequences or data loss can still have a negative impact.

Most commonly, breaches lead to businesses taking up new measures to prevent future attacks and staff time being spent dealing with the consequences of the breach, rather than focusing on their day-to-day work.

impact of cyber threats on UK business

(4) There’s a Lack of Affordable Housing

Housing is not often considered to be a critical part of the UK’s small business infrastructure, but in 2020, it will become more important than ever before.

Just 25% of business owners who responded to a recent YouGov survey said they believe the availability of affordable housing is ‘good’ in their area, and this causes several challenges.

Perhaps the most obvious issue business owners experience is difficulty attracting the best talent. Small businesses can rarely afford to compete on wages with larger organisations, and when housing in the area is expensive, workers will often have little choice but to follow the money.

A lack of affordable housing can also cause productivity concerns. Research from VitalityHealth, the University of Cambridge and the Mercer consultancy, found that employees whose commute to work takes less than half an hour, gain an additional seven days of productivity a year when compared to those with a commute of an hour or more. Hours spent on trains and sat in bumper-to-bumper traffic is clearly detrimental to the UK’s small businesses.

The availability of affordable housing is particularly problematic in southern England and London. 65 percent of small businesses in London think the availability of housing is poor, with the average home costing 17 times the average local household income. Compare this to a city like Liverpool, where the average house costs just five times the average income, and it’s clear why some business owners are concerned.

(5) There’s a Growing Shortage of Talent

While small business owners in London might bemoan the lack of affordable housing, one resource they’re not short of is talent. In many other parts of the UK, business owners face an ongoing challenge to fill their skilled vacancies, and those talent shortages can have serious consequences.

The YouGov survey found that London is the only region where more small business owners said they found it easy to recruit skilled staff. Business owners in the Midlands, the East and Scotland found it nearly twice as challenging as those in London, while those in Yorkshire and the Humber found it the most difficult.

These recruitment challenges mean it can take months for some business owners to find suitable candidates, which can prevent small businesses from growing as quickly as they could. Businesses are left with little choice but to rely on contractors, who tend to be significantly more expensive.

There can also be a knock-on effect on staff retention, with workers able to chop and change positions regularly due to the high demand for their skills.

Reducing this talent shortage is where investment in transport infrastructure such as the HS2 network will pay off. The hope is that it will put an end to long, unreliable and extremely busy journeys and improve the mobility of the workforce so that skills can be distributed more evenly.

What are Your Concerns For Your Small Business in the Year Ahead? 

At Company Debt, we work with the directors of small businesses to help them overcome the financial challenges they face. Whether it’s a cashflow shortage, HMRC tax problems, an inability to access finance or a business that’s struggling to grow, we can provide expert advice and assistance to help you thrive in 2020. Just get in touch for a no-obligation discussion of your circumstances.




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