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The cost-of-living crisis is hitting small businesses – Liz Truss must act

Careful use of fiscal policy, prudent advice, and planning is vital for the coming years.

By Spotlight

Small businesses are the backbone of the UK economy, but a rise in costs and high inflation are posing big risks to their future. These issues were the subject of the most recent NatWest SME Taskforce, bringing together representatives from across business to discuss the scale of the challenge and our response to them.

The cost-of-living crisis arrived at the same time as many small businesses were beginning to recover from the Covid-19 pandemic. On top of this are the 800,000 businesses that were started during 2020 and 2021. These businesses tended to focus on innovation, are much more digitally active, and have a very diverse group of founders. NatWest and the Confederation of British Industry (CBI) published a joint report in July that estimated they could add £20bn to the UK economy if they survive and scale.

Martin McTague, chair of the Federation of Small Businesses, explained that while energy costs were the biggest single factor in the cost-of-living crisis, other costs like National Insurance and materials were feeding the problem. “Most commercial loans are not fixed, so that has an immediate impact on quite a lot of businesses that are already under pressure,” he said. Rising interest rates on mortgages also mean people are cutting back on retail spending, putting that sector under further pressure McTague added.

Energy-intensive sectors are under the greatest pressure, according to Marcus Wright, an economist at NatWest. “[However,] business services seemed to have an inherent strength about them,” he said. “Whether it’s [due to] ICT [information and communications technology] – because businesses are pursuing the digital transition – [or not] we continue to see good figures coming out of that sector. And more broadly, business-to-business services, professional, scientific – those are all sectors that have done reasonably well.

“I think one of the interesting things is business adaptation – just like the success we saw during Covid in how quickly [businesses] can respond,” Wright continued. While some manufacturers like Mercedes have been able to reduce energy use without damaging production, many of the immediate solutions open to businesses – such as using diesel generators – cuts against the transition to net zero. Wright warned that, longer-term, higher energy costs in Europe compared to the US could “hollow out” manufacturing and create supply chain issues. What the global economic situation means is “upward pressure on inflation, supply shortages, supply chain problems across the SME [small to medium-sized enterprise] base to feature for years to come”, Wright said.

There is still a lot of work happening to support small businesses according to Wright. “Our partners are working on Scale-up Week [organised by investment company BGF and the not-for-profit ScaleUp Institute, and taking in place in September] with events in Birmingham and the north-east with the support of government,” he said.

One of the key aspects that was flagged in previous meetings of the taskforce was early-stage advice. “How can we reach out to businesses owners earlier, particularly those really small businesses, to encourage them to seek support and advice at an early stage of financial difficulty, rather than wait for them to get into a very challenging position,” Wright said. NatWest have invested £2m alongside Step Change, which is a debt advice charity, to create a new service, which will be specifically focused on this type of early-stage advice. Natwest are also looking at how they work with trusted partners to get that message out to businesses about seeking advice early.

“Any business owner will want to understand what the economic context and circumstances are going to do this month, in three months, six months, 12 months, and by the sounds of it, the next two years to really understand how to build strategies,” said Dirk Bischof, founder of Hatch Enterprise, which supports under-represented entrepreneurs. Most small business owners, he said, only have less than three months of free cash reserves. So using them really wisely is going to be critical. That means having the right information, at the right time, from a source that they can trust and that they are already listening to.

Hatch will be helping people to understand what the economic reality for their particular business could be if there is a recession that takes three to five years to play out. “We are again only part of the puzzle,” Bischof added. “This should be done across all organisations that are doing enterprise support. The challenge for the incoming PM is how to use fiscal policy to keep the UK out of recession.”

“We saw during Covid, just how powerful policy support can be, just how important it was in rescuing the labour market, rescuing asset markets, rescuing the financial system. They really, really do matter,” said Marcus Wright from Natwest. These are also policies that can be mobilised quickly, again as we saw during the pandemic, he continued. Careful and effective use of fiscal support to businesses and consumers could make the difference between a recession and a period of slow growth until inflation recedes, Wright said.

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