The 2020s are already shaping up to be a decade we won’t forget and we’re barely three months in. Coming on the back of a decade when researchers and policy makers have been focused on the post-financial crisis productivity puzzle, the impact on the global economy from the Covid-19 pandemic brings new challenges and uncertainties.

Economic forecasters, including the OBR, have had little time to digest the ramifications of disruptions to business and social activity, supply chains and travel, not to mention the recent rout in financial markets. Despite this, we have some synchronised fiscal and monetary action from UK policy makers.
So how do we expect the UK’s SME business leaders to process current events and were the major policy actions from HM Treasury and the Bank of England last week targeted on the right issues?

What do we know about the resilience of SMEs?

At the start of the year ERC published the outcome of a two-year study on SME resilience, with a particular focus on ‘under-represented’ entrepreneurs.  The research, carried out across five European cities, including London, probed the strategies and advice sought by small business leaders; and the risk perception and experience of crisis among SMEs.

The study showed that SMEs’ routes to advice and support can vary; this can be driven by the location and background of the entrepreneur. Female- and ethnic minority-led businesses, for example, are more likely to seek out advice from informal networks and mentors when running their businesses.
We also know that the risks entrepreneurs worry about tend to be internal to their business but causes of adversity were more likely external suggesting that leaders of SMEs struggle to identify the most potent business threats.

The study also showed that SMEs don’t necessarily have pre-written plans that they can quickly put into practice and more common responses to past crises have involved tapping into financial reserves and taking advice from friends and family.

In the context of the current coronavirus crisis there are a number of reasons to be worried about the resilience of small firms. With many potential channels through which the pandemic could affect small businesses – consumer behaviour, supply disruptions, cashflow, staff affected with the virus, and for some entrepreneurs additional caring responsibilities depending on evolving government advice – SMEs contingency plans are unlikely to cover all the bases and business leaders will need to be agile in their response.

Pressure on financial and human resources are likely to be key. Route to specialist advice and signposting to support schemes will be crucial. Some SMEs will be better plugged in to these pathways than others, and businesses in lower-income boroughs, our research suggests, may have fewer touch points to this support.

Will Budget measures help?

The Treasury and the Bank of England announced a substantial package of measures to support businesses through this crisis. A number of the measures from government were directed towards managing costs and cashflow pressures on businesses. These included HMRC’s ‘time to pay’, business rates relief for some sectors and premises, specific grants to help with costs for small businesses, some reimbursement for sick pay costs and a new finance guarantee scheme. In addition, the 50 basis points cut to Bank Rate and new Term Funding scheme are designed to support additional lending to the real economy.

This feels like timely measures focused on alleviating temporary, but possibly quite significant, cashflow challenges for small businesses. Engagement across the financial sector with their small business customers will be key, as will awareness raising to qualifying business and simplified processes to access help.
Given how conditions are evolving this will surely not be the last announcement of support from government. With what now looks likely to be a massive demand hit for otherwise viable businesses, further measures look inevitable to ensure business activity can be scaled up again in future and employees’ incomes can have some degree of protection.

Today’s business challenges, tomorrow’s transitions

While inevitably minds are focused on dealing with the Covid-19 pandemic, the Budget also had something to say about the future needs of SMEs and the economy. The transition to a net zero economy (which feels like a very long way off) and the adoption of digital technologies that will support business growth and productivity also featured.

In addition to announcements on digital infrastructure and more investment in Growth Hubs, notably, there was a commitment to a massive expansion of government R&D spending to £22 billion by the end of the parliament. This is a pretty big step towards closing the R&D spending gap between the UK and global leaders. There’s a lot of detail still to be worked out, but ERC research on innovation effects of publicly supported R&D and the growth and productivity outcomes from different types of innovation provide some clues as to where we might get good value for money from this additional spending.

Lee Hopley, Deputy Director, ERC

Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the

Enterprise Research Centre, its Funders or Advisory Group.