Funding gap looms over Britain’s small businesses
Record numbers of Brits are starting businesses, but innovation and export activity among small and medium-sized enterprises have fallen to a four-year low, as a looming funding gap threatens growth.
The latest State of Small Business Britain report from the European Research Council (ERC) found that 36 per cent of working-age adults are running or planning to start a business, the highest level recorded since the survey began in 1999.
Early-stage entrepreneurial activity has doubled since the early 2000s and remains steady at around 12 per cent.
But the report also found that this surge in ambition is failing to translate into stronger performance.
The proportion of SMEs reporting product or service innovation has slumped from 30.4 per cent in 2021 to 24.1 per cent in 2024, its fourth consecutive annual decline.
Export activity has also dipped, from 19.4 per cent of firms in 2021 to 17.2 per cent two years ago.
Stephen Roper, director of the ERC, said: “The UK has a remarkably resilient and creative entrepreneurial culture. More people than ever before want to start and grow businesses”.
“But ambition is not enough. We are seeing a worrying decline in innovation and exporting, the very behaviours that drive productivity and growth, and there is considerable uncertainty around the future of small business support”.
Funding threats loom
The report warns that the UK’s entrepreneurial ecosystem is deteriorating, with expert ratings as part of the survey sliding from “sufficient” to “less than sufficient” since the pandemic.
Access to capital and policy support were named as ongoing bottlenecks.
Within that, a key concern for small businesses has been the future of the UK Shared Prosperity Fund (UKSPF), which is due to end in March.
The ERC has described the scheme’s conclusion as a “severe funding threat” to local business support.
Mark Hart, deputy director of the ERC, argued: “The government’s small business strategy set out some welcome commitments. But delivery is now a risk due to funding uncertainty. We need a stable, coherent business support system that reflects the realities of the UK’s diverse business population”.
The findings come amid wider pressures on UK small businesses, with a recent House of Commons Business and Trade Committee report concluding that small firms are facing cumulative challenges, in some cases comparable to those experienced during the pandemic.
These include late payments, rising energy costs and administrative bottlenecks.
The ERC report has estimated that late payments cost the UK economy £11bn a year, with micro-businesses, which make up 81 per cent of employer firms and employ over four million people, most exposed.
Economic uncertainty has been the most frequently named barrier to turnover, with the report concluding that without clearer long-term funding, the UK risks failing to convert record ambition into actual growth.