Inflation and higher interest rates are affecting small and medium businesses’ (SMBs) ability to create jobs and get the funding they need to grow according to Intuit and global economist professor Ufuk Akcigit and his co-authors.
The report, titled 2023 Intuit QuickBooks Small Business Index Annual Report reveals how small businesses have been negatively impacted in 2023, despite employment levels trending upwards. Intuit, the fintech behind Intuit TurboTax, Credit Karma, QuickBooks and Mailchimp, has shown SMBs are spending 20 per cent more on their credit cards as a result of inflation and high-interest rates than they were before the pandemic.
Analysing more than 3.4 million Intuit QuickBooks customers and surveys of more than 5,000 small businesses in the UK, the US and Canada, Intuit also shows these payments have risen to 26 per cent, causing many SMBs to find themselves in a difficult situation.
Sasan Goodarzi, CEO of Intuit said: “Becoming an entrepreneur is a bold decision. Given the significant impact new and growing small businesses have on job creation, innovation, and the economy, policymakers and industry leaders should be equally bold in creating an environment where small businesses can grow and thrive. We remain focused on working across the industry to create new and innovative ways to serve our customers and help solve their most pressing challenges.”
Growing pains in a tough environment
These pressures are affecting jobs. In the UK, small business job vacancy growth rates declined in all of the first eight months of 2023. Similarly, small business employment rates declined in the first five months of 2023 in the US and in seven of the first eight months of 2023 in Canada.
Nonetheless, there are positives in the sector. For example, entrepreneurship is stronger than ever as solopreneur (non-employer businesses) numbers have risen. But even this positive stat has a caveat as in the US and Canada fewer new businesses are creating jobs. This is especially concerning in the US as more than a third of all jobs are with small businesses while in Canada and the UK it’s more than two in five.
Funding challenges also present themselves. Roughly half of small businesses in the UK, US, and Canada, are self-funded by the owner. New businesses and businesses owned by women or members of underrepresented racial groups often face greater funding challenges. Consequently, despite inflation declining over the past year, small businesses in the UK, US, and Canada say rising costs are still the number one challenge they face.
A spotlight on the UK scene
The report examines the pivotal role of small businesses within the UK economy. It evaluates their economic performance, owner characteristics, financing practices, digital transformation efforts, and the diverse array of challenges they encounter.
It reveals how small businesses contribute strongly to the economy. In the UK, nearly 99 per cent of all businesses are small businesses. They provide nearly 44 per cent of all jobs (rising two per cent between 2011 and 2022). More than 82 per cent of UK firms have less than 10 employees and collectively employ nearly 19 per cent of the country’s workforce. In addition to solopreneurs (non-employer businesses) they also contribute a significant proportion of the UK workforce.
The share of non-employee businesses in the UK has increased from 68 per cent in the early 2000s to 74 per cent today. The rise of the gig economy and the use of automation tools – which let solopreneurs single-handedly run their operations – could also be facilitating this increase. The UK also has the highest percentage of business owners over 65 – making up nine per cent of the total group.
Funding the costs
Nearly half (48 per cent) of small business owners have used personal savings at some point to fund their business. Small businesses in the UK are least likely to have sought funding (with 59 per cent not seeking any) in the past 12 months compared to 48 per cent in the US and 54 per cent in Canada.
About a third (32 per cent) of UK small businesses agree that, over the past 12 months, the cost and availability of financing have deteriorated, rising to 39 per cent amongst the youngest firms aged zero to five years who are in the crucial early stages.
At the same time, monthly credit card expenditure has increased 22 per cent since the pandemic – again higher than in the US (20 per cent) and Canada (18 per cent), equivalent to £2,400 per business. Due to the current high-interest rate environment, monthly credit card payments against account balances have risen 25 per cent since pre-pandemic, equivalent to almost £2,000 per business.
Digital tools create growth
The report indicates a clear correlation between higher use of software, apps, and other digital technologies and better business performance. In the UK – much like the US – a substantial 54 per cent of enterprises that are high users of digital tools (using eight or more) report positive revenue growth. The report reveals the top three digital tools used by UK small businesses as:
- social media (51 per cent)
- business website (50 per cent)
- accounting/financial software (45 per cent)
Global economist, and Arnold C. Harberger professor of economics at the University of Chicago, Ufuk Akcigit said: “The Intuit QuickBooks Small Business Index Annual Report gives unique visibility into the health of small businesses and the issues they are facing today.
“Inflation rates have been soaring in the UK since 2021, and reached a peak in October 2022. Even now, consumer prices have risen 6.3 per cent in the past 12 months.
“Against this backdrop, the annual report indicates small businesses have been funding their business through their own savings or credit cards – which are incurring extra costs due to higher interest rates. Our goal is for policymakers, industry leaders, and aspiring entrepreneurs to draw valuable conclusions from this in-depth analysis to create policies and foster an environment conducive to the success as well as the resilience of small businesses within these specific sectors and regions.
“Part of this includes a greater diversity of funding options so small businesses don’t have to struggle with extra costs in today’s high interest environment.”