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Society, Politics & Law

How are small firms faring in the credit crunch ?

Updated Monday 19th January 2009

Colin Gray looks at the impact of the recession on small businesses.

With most of Britain in the cold grip of winter and the effects of the credit crunch, August 2007 seems a long time ago. That is when one of biggest UK mortgage providers, Northern Rock, raised the alarm that it was finding it difficult to raise funds from the world’s money markets and ushered in the dreaded credit crunch, with the biggest run on a British bank in recent memory. At the time, however, many thought it might remain a local problem. Indeed, the 2007 third quarter Quarterly Survey of Small Business in Britain, which is based in the Open University Business School (OUBS) and has been monitoring small business performance every quarter since 1984, found that the net percentage of small firms reporting increased sales was at a four year high on 26%. On top of that, the net percentage balance of small firms expecting sales to rise in the coming quarter was at its second highest level since the Quarterly Survey began (28%).

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very small firms account for more than 95% of all enterprises in Britain

Sadly, it was not to be. In the final quarter of 2007, the net percentage balance on actual annual sales (the percentage of respondents reporting an increase less the percentage reporting a decrease), slumped to just 12% and has continued to fall. Expectations on sales have been negative for the last two quarters of 2008. Not surprisingly, this has had a significant impact on the survival of firms. Furthermore, it appears that the very small firms of fewer than 10 employees are most adversely affected, which is worrying for the entire economy. The latest statistics from the Department for Business, Enterprise and Regulatory Reform (BERR) - show that these very small firms account for more than 95% of all enterprises in Britain and just under one quarter of national sales turnover (23%) but that they also account for most of the closures in Britain’s declining stock of businesses. In fact, closures had already overtaken new start-ups by the beginning of 2007.

The main economic impact of the credit crunch on small firms is now seen in the labour market and its effects on unemployment. The Office of National Statistics December release shows a steady increase in unemployment from the third quarter 2008, heading for the 2 million mark by the end of December and still climbing. With more small firms shedding staff than those hiring, the Quarterly Survey has recorded negative percentage balances for employment since the second quarter 2008 and negative expected unemployment since the end of 2007. The signs of a deepening slowdown have been clear for over a year.

When asked in July about the measures they are adopting to cope with the economic downturn, most small business owners (53%) report that they take a cut in their own earnings and some 38% report that they have cut staff. A further 14% intend to close their business. However, the more entrepreneurial firms seek new markets and business ideas (42%) or increase their marketing and promotion (35%) – as opposed to the 19% who cut their marketing costs.

The trends from national statistics and the Quarterly Survey are not encouraging. Although recessions are often thought to be an opportune time to launch new cost-saving products, processes and services, many small firm owners face a bleak future. Only 18% now expect to have a comfortable pension when they retire and, more worryingly, 8% of small business owners report they do not have any pension provision at all. Consequently, more than one third (38%) will have to continue working longer than they intended. The average age of retirement is likely to be 67 with a significant number resigned to working into their 70s.


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