V4B Business Finance

How are small businesses managing the cost-of-living crisis?

Rising inflation

Businesses that battled through the financial quagmire of the Covid-19 pandemic are now facing another major challenge – high inflation coupled with soaring energy costs.

Owners of small businesses have been hit particularly hard as rising prices squeeze personal budgets as well as business finances.

On top of that there’s the constant concern of declining revenue – a common problem for businesses as people are forced to cut spending during periods of high inflation.

But how did we end up in this situation? What are small businesses doing to ease the pressure of rising costs? Is any help available? What are the long-term prospects for small businesses?

Let’s find out.

What’s causing the cost-of-living crisis?

The cost-of-living crunch is mainly the result of inflation rising faster than incomes. Purchasing power decreases and people have less money to spend.

The UK has seen a fall in real disposable incomes since late 2021. For example, with an annual inflation rate of 10.4 percent in March 2023, something priced £100 a year ago now costs £110.40.

Russia’s invasion of Ukraine has played a major part in high inflation.

In 2021, gas and oil prices increased as countries began easing their way out of Covid lockdowns. A year later, the war in Ukraine resulted in fuel supply shortages that further pushed up energy prices.

The higher costs for energy companies have been passed on to businesses and families in the form of huge spikes in gas and electricity charges.

Ukraine also exported a lot of farm produce including grain and sunflower oil. Disruption in these supplies has further increased global food prices.

Other supply chain problems leading to goods shortages have resulted from spiralling global shipping costs.

How rising inflation affects small businesses

High inflation increases prices for businesses as well as households.

In addition to soaring energy prices, materials and stock cost more as wholesale prices increase.

At the same time, employees may be looking for pay rises to offset falling living standards due to inflation.

And this is happening against a backdrop of ongoing supply chain issues and staff shortages in the wake of the pandemic and Brexit.

If you trade overseas where inflation is lower than in the UK, your business may be less able to compete because your services or products have become comparatively more expensive.

Rising inflation isn’t necessarily all bad news, though. It may present opportunities as well. You could see an increase in sales for instance, as consumers buy goods and services now, anticipating further rises in the cost of living.

However, the overriding feeling among small-business owners appears to be worry and uncertainty over the long-term impact of the cost-of-living crisis.

SME concerns over rising costs

Research indicates many small and medium-sized businesses fear that the cost-of-living squeeze could have long-term consequences for their business.

The latest annual report by PayPal on the SME community revealed that:

  • More than half of SMEs are concerned about future business uncertainty.
  • Three-quarters believe that rising costs are the biggest threat to their business.
  • 27 percent fear their business might fail as a direct result of tough financial conditions.

These concerns were mirrored in the 2022 Barclays’ SME Barometer, which found that 75 percent of SMEs are worried about the long-term impact of the cost-of-living crisis.

Other research shows that:

  • Two-thirds of businesses see rising costs as their biggest challenge.
  • 43 percent are worried about sales figures.
  • Almost one-third are concerned over rising interest rates and high inflation.
  • 26 percent are worried about being unable to pay their bills.
  • Nearly one-quarter are worried about supply and material shortages caused by ongoing geopolitical instability.

Statistics like these point to the need for support to enable SMEs to achieve their goals and optimise growth while navigating the challenges of the rising cost of living.

But what help are businesses currently getting?

Government strategies to help SMEs manage rising costs

Government initiatives to help SMEs combat rising costs include cheaper loans and energy bill subsidies.

Recovery loans

The Recovery Loan Scheme (RLS) was initially designed to help SMEs cope with the effects of the pandemic.

It’s now been widened to support businesses during high inflation and the downturn in economic growth.

Under the scheme, the Government guarantees lenders 70 percent of a business loan. This is aimed at enabling businesses to get crucial financing at lower interest rates.

The RLS was introduced in April 2021 and has now been extended until June 30, 2024.

Energy bill discounts

Unlike domestic energy, there’s no price cap on business energy. Instead, financial support comes in the form of the Energy Bills Discount Scheme (EBDS).

The EBDS replaced the Energy Bill Relief Scheme on April 1, 2023 and will run for 12 months.

The Energy Bills Discount Scheme gives businesses a discount on their electricity and gas unit rates – the amount you pay for each unit of energy you use, measured in kilowatt-hours (kWh).

How are small businesses responding to the cost-of-living crisis?

SMEs are increasingly looking for ways to reduce risks posed by the cost-of-living crunch in order to put their business on a firmer footing.

These measures include cutting costs and operating more efficiently to relieve pressure on cash flow.

Potential ways to do this include:

  • Downsizing business premises.
  • Encouraging employees to work from home.
  • Ensuring a realistic budget.
  • Making more use of social media marketing.
  • Using part-time staff and freelance contractors.

Businesses can also negotiate a better deal instead of automatically renewing contracts for services they buy such as business insurance and broadband.

Excess charges for finance can be avoided by staying within their business credit card limit and making loan repayments on time.

And some SMEs are able to take advantage of tax relief measures and regional business support schemes.

What does the future hold for small businesses?

High inflation and the rising cost of living are squeezing consumer spending as energy prices increase business costs.

This has resulted in many small businesses facing the prospect an uncertain future as a result of the UK’s economic challenges.

One thing is for certain though. Historically, SMEs have shown remarkable resilience when faced with a challenging economy. And this resolve has never been more important than it is now.

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