Soaring costs have greater impact on UK SMEs

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Fewer firms are at risk of failure compared with last year, but smaller companies are struggling to stay afloat after the end of pandemic restrictions was met by soaring costs.

Only 5.7 per cent of companies said they were at risk of failure in April, compared with 15 per cent at the start of last year, according to analysis of figures from the Office for National Statistics by the London School of Economics (LSE).

However, the recovery has not been even. In the past six months there was a rise in the number of smaller firms that believe they are at risk of closing down within the next three months. Experts believe they have been hardest hit by the end of the furlough scheme in September, the wave of Omicron infections and rising energy prices.

The risk of closure among companies with fewer than ten employees dropped from about 15 per cent at the start of the survey early last year to below 5 per cent in October before rising above 7 per cent at the start of this year. It currently stands at nearly 6 per cent.

The biggest firms were the least likely to report that they would close permanently because of business losses due to pandemic restrictions. The proportion at risk has remained under 5 per cent throughout the survey period.

Peter Lambert, an economist at LSE and one of the authors of the report, said small firms were more likely to exit the market but the gap between smaller and larger firms had begun to shrink. “While that recovery was fantastic to see there has been an uptick since,” he said, citing the end of furlough and price rises in energy and raw materials.

Nearly 2,000 companies went bankrupt in April this year, almost double the level recorded in April 2021 and nearly 40 per cent higher than the pre-pandemic trend, according to the latest government statistics.

Lambert, who wrote the analysis with LSE colleagues Professor John Van Reenen and Apolline Marion, said that large firms did not perceive a higher risk in the recent crises “whereas small firms are much more sensitive”, possibly because of the level of debt smaller companies had to take on.