For First Time, More Small Firms Expect To Shrink Than Grow

According to the latest report from the Federation of Small Business (FSB) the share of small businesses who said they expected their business to shrink or close, or to sell up the business over the next 12 months – 27 per cent – outweighed the proportion who predicted their business would expand – 25 per cent – in the second quarter of this year.

It is the first time in the history of the Small Business Index (SBI) that the proportion of small firms bracing for contraction, sale or closure outnumbered the percentage hoping to grow.

In the first quarter, by contrast, nearly half of small businesses (48 per cent) expected to grow over the coming year, while only around one in six (18 per cent) were bracing for contraction, sale or closure. The percentage of small firms predicting that they would remain around the same size has gone from a third in Q1 (34 per cent) to nearly half in Q2 (49 per cent).

This unprecedented finding underlines the urgent need for the Government’s forthcoming Small Business Strategy to take decisive action to help small firms grow, and to get the economy humming.

The survey of 1,400 small business owners also found their confidence levels have slipped further since the start of the year, and are still deeply in negative territory.

The headline confidence measure dropped to -44 points, down from -41 points in the first quarter of this year.

The gloomy finding likely reflects small business sentiment around the introduction of higher levels of employer National Insurance contributions and rises in the National Living Wage, which came in at the start of Q2 in April, as well as fears around the impending Employment Rights Bill, which looks set to impose a new raft of costs and risks onto the shoulders of small employers.

The pessimistic outlook was reflected in small businesses’ predictions for their revenues over the next three months, with over two in five (42 per cent) predicting they would decrease, and only around a quarter (27 per cent) looking forward to higher revenues over the third quarter.

Twice as many small businesses shed staff over Q2 (20 per cent) than increased their employee numbers (9 per cent), with similar numbers predicted for the next three months (19 per cent and 8 per cent respectively).

In terms of factors which will constrain their growth over the next year, small business owners overwhelmingly pointed to the domestic economy, selected as a top-three concern by 64 per cent of small businesses. The tax burden was in second place, at 39 per cent, closely followed by labour costs, at 37 per cent – both likely in large part a response to the hike in employer National Insurance contributions.

Tina McKenzie, FSB’s Policy Chair, said: “For the first time in the history of the Small Business Index more small businesses are predicting they will shrink than expand, meaning that as a country we are potentially facing a very dangerous situation."

“Confidence being so low, and not showing any improvement since the start of the year, is bad enough. But add in the fact that stagnation and pessimism among small businesses spells huge risk for the overall economy, and the upcoming Small Business Strategy needs to be ambitious enough to meet the scale of the challenge facing the UK’s small firms."

“The Government has made all the right noises about supporting the small business community. Now is the time for ministers to make good on their promises, and to use the Small Business Strategy to tackle issues like late payments by big businesses to their smaller suppliers, and the blanket imposition of personal guarantees on small business loans, both of which are enormous brakes on growth among small firms."

“Meanwhile, the Employment Rights Bill is also a massive dampener on small firms’ appetite to take on staff. The Bill is set to load a staggering £5 billion in costs per year onto employers, so it’s no surprise that nine out of ten small employers are seriously concerned."

“With no significant changes as yet to the proposals, especially to the policy of expanding day one unfair dismissal rights, the Bill will act as a thumb on the scales against taking on a new employee, maybe someone who is further from the employment market. This will endanger the Government’s goal of hitting an employment rate of 80 per cent, and will cut off routes into work for countless people who are looking for a role that will grow their prospects.”