Small Business Statistics 2023: An Overview of the Market

Between Brexit, two general elections, and a global pandemic, the past five years have been a particularly difficult time for small business owners.

This triple disruption has played a big role in the rising cost of living. Leaders of both small and midsize businesses listed inflation as a key concern.

• The number of small businesses in the UK has declined from 5.9 million in 2020 to 5.5 million currently.
• That’s a significant fall of 6.6%.

However, SMEs still account for 99.9% of the UK’s business population: a clear indication of the important role small businesses continue to play in the national economy.

So which sectors are booming? Where are the most failures occurring? Which industries are poised for growth?

Below, we’ll examine UK businesses on a sector-by-sector basis, as well as identifying the main barriers, and opportunities, for new startups.

Let's take a look.

UK small business statistics

How many small businesses are there in the UK?

More than 99.9% of all UK businesses are small to medium-sized, meaning they have 250 or fewer employees.

In total, the most up-to-date government figures show a total of 5.58 million SMEs currently active in the UK. Small businesses (0-49 employees) number 5.5 million, making up 99.2% of total businesses.

The UK is also home to 7,655 large businesses (classed as those that have more than 250 employees).

Source: GOV.UK

As shown in the above chart, SMEs account for an estimated 61% of employment (16.3 million) and 52% of turnover in the UK private sector. Employment within small businesses alone amounted to 12.9 million (48% of total) with a turnover of £1.6 trillion (36%).

Currently, 1,415,980 of UK small businesses have employees and 4,174,920 have zero employees. This is likely due to the 46% of people in the UK who have started a side hustle.

How does the number of UK SMEs compare to previous years?

In 2020, there were 6 million SMEs in the UK – 6.6% more than there are at the moment.

When records began in 2000, the overall number of private sector businesses stood at 3.5 million.

Overall, the UK has still enjoyed a 60% increase in SMEs over the past 22 years.

How many new businesses are launched in the UK?

The latest Business Statistics briefing paper from the House of Commons Library outlines the number of newly-launched businesses in 2021.

These are defined as businesses that were active and began trading in that reporting year. They are measured in proportion to the whole UK business population.

There were 810,316 new businesses launched in the financial year ending in 2021.

According to the Business Statistics bulletin, this is an increase of 21.8% when compared with 2019. It is also the highest number of launches on record.

How many UK business failures are there?

The government’s business population estimates 2021 show that the total business population decreased by 390,000 (6.5%) between 2020 and 2021.

That’s 23% higher than the number of business failures in the previous year.

2020 saw the lowest number of business failures since 2016. This was due to the large number of government support measures announced in response to COVID-19.

Clearly, as these measures have been phased out by the UK government, business failures have increased.

Indeed, insurance company Euler Hermes has predicted UK insolvencies will be at least 20% higher in 2022 than in 2021.

This is supported by data from The Insolvency Service. It reported 1,560 company insolvencies in England and Wales in January 2022 – double that of January 2021.

How many new businesses fail in the UK?

On average, almost 20% of new businesses fail in their first year.

But it’s not just new business owners that can fall foul of success. The Insolvency Service report also reveals that only one in three small businesses manage to survive for a minimum of 10 years.

What kind of firms make up the UK’s business population?

Of the UK’s 2.05 million corporate businesses, 46% of those are limited companies with one employee.

The number of companies and public corporations has continued to rise and now represents 74.3% of total UK businesses.

Meanwhile, the proportion of sole proprietors and partnerships has fallen to 22.1%.

Source: ONS

UK small business finance statistics

Smaller organisations typically have fewer resources and less spare capital.

As a result, data sources show that smaller SMEs suffered more financial repercussions from COVID-19 than larger businesses.

The ONS Business Impact of COVID-19 Survey (BICS) found that around 45% of SMEs saw turnover fall by at least 20% post-COVID.

As a result, most of the funding sources we looked at have seen a significant uplift over the past two years as more small business owners look for ways to increase capital.

How many UK small businesses use external finance?

On average, 56% of SMEs have sought external finance in the last three years, as found by the British Business Bank 2021 SME Finance survey.

The most sought-after financial support in 2021 was government or local government grants.

The second-most popular choice was the coronavirus Bounce Back Loan, designed to help smaller businesses to access finance more quickly during the coronavirus outbreak.

43% of these small businesses have already used up all of their funding, and a further 16% have already spent more than half.

Almost one in five SMEs have since reported they are concerned about their ability to make full repayments as and when they become due.

How many UK businesses have used private debt?

Private debt typically refers to loans made by non-bank lenders to firms. It is also sometimes referred to as direct lending or private credit.

Research conducted by the British Business Bank shows that over £9bn of private debt capital is invested annually in SMEs and lower mid-market companies.

According to Deloitte’s annual Alternative Lender Deal Tracker, 785 private debt deals took place in the UK in 2021. This reflects a year-on-year increase of 89% compared to 2020.

How many equity finance deals were completed by UK small businesses?

Equity finance refers to the process of selling shares to raise capital.

KPMG has reported that 803 private equity deals worth £46.8bn were completed in 2021 – the highest level to date.

According to data published by the British Business Bank, during the first three quarters of 2021 in the UK:

• Equity investment in smaller businesses surged by 130% to reach £14 billion
• 1,811 deals were completed by Q3
• 50% of those deals were in London

How many small businesses are financed by venture capital?

Typically, small businesses in the UK only get a small slice of the venture capital (VC) pie.

This is because VC is usually targeted by larger companies with over 100 employees. VC deals usually take a number of years to complete (typically five to seven), with the aim of only making a return once a company has grown.

There were 57 venture capital trusts (VCTs) in the UK in 2021. This is a significant drop from ten years ago, when there were 128.

However, the amount of funds raised by VCTs has been on a rising trend in recent years and has more than doubled from 2009 to 2010.

Venture capital is still largely a boys’ club. According to data from private market data company Pitchbook, of VC deals made in 2017:

• Less than 1% went to entirely female teams
• 10% went to teams with mixed genders
• 89% went to entirely male teams

Source: GOV.UK

What alternative finance options can small businesses use?

In addition to equity and debt, the UK boasts a plethora of alternative finance options to fund a startup or drive business growth.

Small business crowdfunding 

Back in 2011, crowdfunding websites backed just eight deals in the UK. In 2020, this has ballooned to 433 successful campaigns.

However, crowdfunding seems to have slowed as a result of the COVID-19 pandemic.

In the first semester of 2020, the UK crowdfunding market collected £103 million in total – a 25.4% fall compared to 2019.

Source: Crowdfunding Hub

“Whilst crowdfunding has proliferated over the past decade, it does not match the diversification, due diligence and ongoing management that comes with investing in venture capital funds – and the results back this up – venture capital backed startups are four times more likely to exit than crowdfunded startups.” – Startups 100 Alumni & Investment Director, Triple Point Ventures Seb Wallace

“Exit” typically refers to an event in which investors in a startup are able to cash out their investment, such as through an acquisition or initial public offering (IPO).

Small business asset finance 

The BBB Small Business Finance Markets 2022 report shows that the SME asset market increased by 25% in 2021, giving it a total value of just under £20 billion.

This new growth follows a fall of 21% in 2020.

As the BBB report notes, such a noticeable market recovery means the annual new business level in 2021 was only 1% below 2019 (its pre-COVID peak).

Peer-to-peer small business lending 

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses using specialist digital platforms.

Data from the Cambridge Centre for Alternative Finance shows that peer-to-peer business lending has the lowest volume among all entities. Still, it has been growing steadily since 2012, and was valued at £4 billion in 2020.

How has Brexit impacted small business investment?

Following the 2016 Brexit referendum, data from the Bank of England (BoE) shows that around 45% of businesses rank Brexit as one of the top sources of uncertainty for their business. So why is this significant?

Well, according to the BoE, businesses with a higher level of Brexit uncertainty have enjoyed less investment growth post-referendum than those with lower Brexit uncertainty.

In its May 2021 Decision Maker Panel survey, the BoE asked business members how they thought the UK’s decision to leave the EU had affected investment.

Businesses reported that in 2020, investment was 5.5% lower than it would have otherwise been.

Source: Bank of England

How has COVID-19 impacted small business investment?

Small businesses across the UK benefited from the government’s financial support measures. 1,670,939 government-guaranteed loans worth £79.3bn were evenly distributed to organisations throughout the country.

Parliament bulletins also show that 11.7 million employee jobs were furloughed as part of the Coronavirus Job Retention Scheme (CJRS), costing £70 billion.

However, self-employed workers were not given the same level of support as small businesses. Many were not eligible for the CJRS scheme, and were unable to pay their own salaries as a result.

Consequently, the number of people registered as self-employed dropped by a huge 8.6% in 2021 compared to 2020. This was after increasing 93.9% over the previous 20 years.

Source: BEIS Business population estimates 2021

UK business sectors

Which sector has the most UK businesses?

The UK sector with the biggest number of small businesses is construction. This industry makes up 16% of the UK’s business population, and is almost entirely populated by SMEs.

Source: GOV.UK

Which UK business sector employs the most people?

The UK sector that employs the largest number of people is wholesale or retail trade. This industry is responsible for 18% of the UK’s workforce.

46% of its employees work for small or medium-sized businesses.

Source: GOV.UK

Which UK sectors have grown over time?

As the below charts show, very few industries managed to grow their business population between 2019 and 2020.

Most notably, the number of businesses in the energy sector (electricity, gas, water supply, mining and quarrying) fell by 26.4% as a result of rising supply chain costs.

However, of the three industries that did grow:

• Wholesale and trade has grown by 3,800 businesses
• Finance and insurance has grown by 6,100 companies
• Real estate has grown by 7,100 firms

On a positive note, the total number of employed people between 2020 and 2021 grew by 7,600. This suggests that established businesses have enjoyed growth over the past year.

In fact, only six out of 16 industries did not grow their workforce. These were:

• Agriculture, Forestry, and Fishing
• Information and Communication
• Finance and Insurance
• Professional and Scientific
• Administrative
• Arts and Entertainment

Source: GOV.UK

Which sectors have been most impacted by COVID-19?

Analysis from software company Xero shows that the hospitality sector (54%) and the arts and recreation industries (41%) recorded the largest falls in revenue post-COVID.

COVID-19 also seems to have led to an increase in redundancies in specific sectors.

The SME Finance Monitor 2021 found redundancies were most often reported by Hospitality (30%) and Wholesale/Retail (21%) SMEs.

The same report also found that seven in 10 of those who had been very negatively affected (8% of all SMEs) cited supply chain issues as a major factor.

Combined pressures from COVID-19 and Brexit have led to increased prices, with goods being harder to source and there being more issues with trading in and out of the UK.

Sectors engaged in importing and exporting appear to have borne the brunt of this impact.

In one major study conducted by the British Chamber of Commerce, 51% of manufacturers said they have experienced difficulties in the trade or movement of goods since Brexit.

Barriers to UK business

In this section, we’ll highlight some of the biggest barriers to entry when starting a business in the UK.

This is based on our own internal data of 1,000+ responses, collected by the Startups expert research team between January and March 2020.

We first asked: what do you believe will be the biggest challenge your business will face as it grows?

Based on our polling, the main barriers to entry are:

• Retaining valuable employees – 25%
• Increasing revenue – 25%
• Embracing technology – 22%
• Maintaining profitability – 14%
• Securing finance – 12%
• Other – 2%

Finishing in joint first place were talent retention and profit increase. Together, these responses made up half of the top concerns amongst all of our pollees.

Embracing technology was another top concern. As the world moves online, the need for specialist software such as small business website builders has increased amongst SMEs.

We therefore posed the question: what are the barriers to adopting new technologies in your business?

Easily the most common response was finance, with half of our survey respondents citing Cost as their top barrier.

The second-highest option,Time/internal resource constraints, was chosen by 1 in 5 respondents. 

How has COVID-19 affected UK small businesses?

As a consequence of lockdown and social distancing measures, the pandemic struck businesses that couldn’t work without established tech infrastructure the hardest.

Those most affected by the COVID-19 economic shock were accommodation and food, arts and recreation, and construction organisations. These are all sectors that smaller companies are more likely to operate in.

Consultancy firm Umun found that 41% of SMEs reported losing a large client or experiencing adverse market conditions in 2021. This was up from 29% in 2019.

Post-COVID, the so-called ‘pingdemic’ also began to wreak havoc.

At its peak in July 2021, the number of people being told to isolate by NHS Test and Trace was 607,486 in England, according to figures released by the Department of Health.

Also highlighted in Umun’s report was the fact that 33% of SMEs said long-term sickness absence had caused a ‘critical’ impact on company finances and business success.

How has Brexit affected UK small business?

Britain’s exit from the EU has created many challenges for small business owners to contend with. Chief among them has been delayed or obstructed cross-border trade in Europe.

City AM surveyed UK SMEs in November 2021. It found that 64% of UK SMEs believe that Brexit has negatively influenced the UK economy.

Two in five respondents said their costs had increased since the referendum results were announced, particularly costs associated with importing goods.

16% reported suffering a talent shortage as they were finding it harder to recruit staff due to stricter immigration laws.

That being said, Startups spoke to 70 startup owners (who founded their businesses after May 2021). Our results – shown below – indicate that the majority (51%) think Brexit has not been an obstacle.

This suggests that entrepreneurs are adapting their business plans to accommodate for the disruption caused by Brexit.

What barriers do minority small business owners face?

The gender funding gap has historically been a significant barrier to women starting a business.

According to investment tracker Dealroom, female entrepreneurs’ share of the UK’s multi-billion-pound VC funding market has stayed under 2% for the past 10 years.

Startups recently carried out our own investigation into the gender funding gap. We discovered that, on average, businesses with just one male founder received seven times more investment than women-owned firms.

Racial bias is also a factor in new business success.

The same BBB report found that 18% of external finance applications from ethnic-minority-led businesses were turned down. This is compared to 10% of white-led business applications.

Research from the Black Business Network has highlighted the impact this is having on Black startup owners. Only 43% of Black entrepreneurs surveyed said they’d trust banks to support them with the capital to grow their businesses.

How do UK small businesses compare to the US?

In 2021, there were 32.5 million small businesses in the US. This represents a 2.52% uplift year on year, and a growth of 9.8% over the four-year period from 2017 to 2021.

It also makes the UK small business population just under one-fifth the size of the US’.

Each month, the US Census Bureau releases data on the number of new business formations.

The Census Bureau’s Business Formation Statistics dataset shows a surge in the number of people filing tax paperwork to start new businesses.

From January through November, just under 5 million new business applications were submitted, a jump of 55 per cent over the same period in 2019.

In February 2022, this figure was 419,518. Of these, 80,657 were based in the retail sector.

According to Oberlo, the US states with the most small businesses in the country (as of 2021) are:

• California: 4.2 million
• Texas: 3 million
• Florida: 2.8 million
• New York: 2.3 million
• Illinois: 1.2 million

While the UK’s most-employed sector is retail, statistics from the Office of Advocacy show that in the US, that title goes to the healthcare industry.

There are around 22 million US workers in the healthcare industry. As one of the country’s largest and fastest-growing sectors, it accounted for 14% of all US workers in 2019.

Source: Census Bureau

Summary

We’ve compiled the most compelling small business statistics, as well as polling our SME readers, as part of our quest to create a comprehensive guide to the UK startup landscape.

• Business failures might be increasing, but the number of new business launches also shows no sign of slowing down.
• Entrepreneurial spirit clearly hasn’t slowed in the face of challenges like COVID-19 and Brexit.
• Instead, a substantial number of new opportunities have been created for startups looking to enter exciting, growing markets like finance and real estate.

With an ageing population, along with a valuable beauty industry and an increased focus on sustainability, we’ve offered ‘healthtech’ and ‘sustainability’ as two business trends to tap into in 2022.

We’re excited to see what 2022 has in store for the UK’s small business community. For more inspiration, you can check out our Business Ideas 2022.