How the COVID-19 crisis is affecting UK small and medium-size enterprises

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Small and medium-size enterprises (SMEs) account for 50 percent of the total revenue generated by UK businesses and 44 percent of the country’s labor force.1 With the COVID-19 pandemic causing a crisis that affects both lives and livelihoods, how are these vital parts of the economy feeling?

According to a recent McKinsey online survey of UK SMEs, more than half view the country’s economy as very or extremely weak (Exhibit 1), and half expect market stagnation or recession.2 Those perceptions likely reflect their own business performance, which worsened in May 2020 compared with April 2020.

An increasing number of UK small and medium-size enterprises perceive the UK economy as weak.

The effect of the COVID-19 crisis on SME performance across the United Kingdom is immense. Of surveyed SMEs, 80 percent report stable or growing revenue for the year before the pandemic began. Today, 80 percent of SMEs say their revenues are declining (Exhibit 2). They also report several related effects:

  • concern about defaulting on loans (one of four)
  • concern about their ability to retain employees (24 percent) and doubt in their ability to sustain their supply chains (28 percent)
  • expectations of reducing headcount in the aftermath of the pandemic (28 percent) and postponing growth projects (36 percent)
Around 80 percent of UK small and medium-size enterprises have seen a revenue impact from the COVID-19 crisis.

It is worth noting that there are differences across UK sectors. The most negatively affected sectors are logistics, construction, and agriculture (more than 90 percent of surveyed SMEs in these sectors report reductions in revenue), while the least affected SMEs are those in scientific, finance and insurance, and education sectors.

In all, the bleak expectations for the overall UK economy and the negative trends in SME revenue paint a worrisome picture. Under current conditions, nearly one of five surveyed SMEs believe they will be out of business by August 2020. That figure increases to 60 percent for April 2021(Exhibit 3). A drop in SME revenue would have a disproportionate impact on SME survival: nearly three of four say they would be out of business by January 2021 if their revenue were to decrease by 10 to 30 percent.

UK small and medium-size enterprises feel more resilient than they did in April 2020, but more than half may be out of business in 12 months.

The improvement in individual business expectations seen in May compared with April likely reflects the key role that public-sector support has played for most SMEs. That dynamic is not expected to change. In aggregate, 50 percent of SMEs in the United Kingdom either already have or are planning to take advantage of the government’s furlough program (in which the UK government pays up to 80 percent of a furloughed employee’s salary, up to a maximum of £2,500 per month). That figure increases to more than 75 percent for enterprises with more than ten employees. Those businesses employ more than two-thirds of the overall SME labor force.

In addition to taking part in the furlough initiative, SMEs are drawing on other forms of government support; participation in various programs is expected to approximately double in the near future. Uptake has also varied by program. For example, according to the survey results, nearly a quarter of SMEs have applied for business-rate3 relief and deferral of tax payments, with smaller numbers having sought loans, claimed statutory sick pay, and requested protection from eviction (Exhibit 4).

UK small and medium-size enterprises, particularly medium-size ones, have been actively using government support.

Government support has been particularly critical for larger SMEs. Demand for all types of assistance is markedly higher in companies with more than ten employees and in those with more than £2 million in annual revenue: a third or more have applied for deferral of tax payments and business-rate relief. Similarly, while 35 percent of SMEs surveyed say they would seek a loan or government support in an effort to sustain their business, the percentage increases to more than 55 percent for SMEs with more than 50 employees.

The COVID-19 crisis has had a severe impact on the revenue of UK SMEs, and government support has been key for these businesses. Policy makers can expect the uptake in various support programs to continue to increase in the short term.

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