Professor Mark Hart discusses the impact of Covid-19, financial support from the Government and the adoption of digital technology on SMEs.
This blog post was produced for inclusion in the Birmingham Economic Review for 2021.
The annual Birmingham Economic Review is produced by City-REDI, University of Birmingham and the Greater Birmingham Chambers of Commerce. It is an in-depth exploration of the economy of England’s second city and a high-quality resource for informing research, policy and investment decisions.
This post is featured in Chapter 2 of the Birmingham Economic Review for 2021, on Industry and Innovation: Pathways to Prosperity.
Click here to read the Review.
Small business sector resilience
The 2020s are already shaping up to be a decade we won’t forget. Coming on the back of a decade when researchers and policymakers have been focused on the post-financial crisis productivity puzzle as well as the implications of leaving the EU, the impact on the global economy from the Covid-19 pandemic brings new challenges and uncertainties. How well, and how quickly, will the UK economy recover in 2022 after many businesses and sectors were effectively shut down in March 2020 and attempts to open up continued to falter during 2020 and well into 2021? An answer to that question will depend on the resilience and innovative behaviour of the small business sector as was the case in the years after the Great Financial Crash.
Positive and negative effects for SMEs
Although the net effect of events since March 2020 have been negative for SME employment and turnover, some businesses have still achieved growth, either as their sectors remained somewhat untouched by the effects of the pandemic or new opportunities emerged. The Enterprise Research Centre’s (ERC) Business Futures Survey undertaken in Q4 in 2020 with 1,000 SMEs provided insights into the way small business leaders were responding to the Covid-19 pandemic.
Perhaps surprisingly, a fifth of SME leaders stated that Covid-19 had had a positive impact on their business, with around a quarter of firms growing turnover in 2020 and a fifth taking on new staff. Perhaps unsurprisingly, 95% of firms reported using video conferencing software more. But SMEs are also making greater use of advanced technologies such as the Internet of Things (64% reporting greater use), augmented or virtual reality (51%) or artificial intelligence or machine learning (48%). Overall, therefore, the survey revealed that established digital technologies are well diffused among UK SMEs and that emerging digital technologies are becoming increasingly more common in 2020 as small business leaders sought to engage in innovative practices designed to recapture lost revenues and engage with new customers and markets.
The survey data also shows a growing awareness of sustainability among firms, with 72% saying they had taken steps to minimise the environmental impact of their business over the past year, in spite of Covid-19. Large numbers reported taking actions within the business to move towards ‘net zero’ targets. Around a third of firms (34%) said greater digital adoption had resulted in more sales, while nearly one in four (38%) said it had boosted their innovation activity. And while some saw investment in technology as a necessary step to cope with lockdown restrictions, for nearly one in five it had prompted a ‘pivot’ to completely different business models to respond to rapidly changing client and customer needs.
SME Finance Monitor
The quarterly SME Finance Monitor provided regular insights into access to finance since the last recession and was invaluable in monitoring the immediate and long-term implications of the Covid-19 pandemic crisis. An immediate impact in Q1 and Q2 in 2020 was the fall in the proportion of SMEs using any external finance but in the period from Q4 2020 to the three months to the end of May 2021, this had returned to pre-pandemic levels (i.e., 42%). At the same time, the proportion of SMEs with no apparent appetite for external finance (i.e., permanent non-borrowers) fell from 50% in Q1 2020 to 32% by the end of 2020 as many small firms needed to prop up their precarious financial position. Another feature of the 15 months to the end of May 2021 was the doubling of the proportion of firms needing to inject personal funds into their business as cash reserves became depleted: from 12% to 25%.
Financial Support from Government
Since March 2020 the UK Government has introduced and extended a range of emergency financial support for business amounting to £164.1bn at the time of writing, and this has been crucial for the vast majority of small businesses and especially in those sectors most affected by the crisis. This total includes £62bn for Coronavirus Job Retention Scheme (CJRS); £46.5bn for Bounce Back Loans (BBL); £27bn for Self-employment Income Support Scheme (SEISS); £23.3bn for Coronavirus Business Interruption Loans Scheme (CBILS) and £5.3bn for Coronavirus Large Business Interruption Loans Scheme (CLBILS). Sources:
1. NAO, 2021, Initial learning from the government’s response to the COVID-19 pandemic;
2. BBB, 2021, British Business Bank support schemes delivers over £75bn of loans to 1.6m smaller businesses
Positive Impact on Investment Planning
A recent study by the Enterprise Research Centre (ERC) found that there were widespread positive short-term impacts of the government support schemes (BBLS; CBILS; CJRS or Furlough) on investment planning. For example, firms which received a combination of Furlough and loans were 17.2 percentage points more likely to plan investments in capital equipment than firms with no pandemic support. These strong effects are consistent across a range of different types of investment planning. Impacts also tend to be larger among smaller firms. This makes sense as smaller firms are likely to be more cash-constrained and so the loan and furlough schemes are making the most difference in these businesses.
Growth ambition and future plans
A final dimension, which is crucial for the recovery, will be the growth ambition and plans of the small business sector and evidence from the SME Finance Monitor in May 2021 provides some grounds for optimism. The growth ambitions of all SMEs, irrespective of size and market orientation, are higher in the three months to May 2021 than at the end of 2020 with those involved in international trade more likely to expect to grow in the next 12 months. Yet, caution is the watchword as two-thirds reported in mid-2021 that they were ‘being cautious due to the future feeling uncertain’ which was lower than in Q2 2020 but 10% higher than before the pre-pandemic. Not all of that caution is driven by the pandemic but includes many aspects of the UK’s current trading arrangements with the EU and other global regions.
To conclude, as evidenced above, the Covid-19 pandemic crisis has produced some unexpected consequences in terms of investment and the adoption of digital and new technologies which will be key components of any recovery and growth strategy for the UK economy in 2022. As has been the case in previous recessions the small business sector, and especially younger small firms, will be at the forefront of delivering that growth but much will depend on the impact of the phasing out of the emergency business support coupled with the ongoing effects of the UK exiting the EU, and the hope is that together we will not witness a haemorrhage of insolvencies and associated redundancies.
This blog was written by Professor Mark Hart, Deputy Director, Enterprise Research Centre, Aston Business School.
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI / WMREDI or the University of Birmingham.