Could COVID-19 lead SMEs and the UK Economy into a Financial Crisis?

Updated: Sep 23

Written by: Beyonce Mulumbi Medi


Introduction


The COVID-19 outbreak, also known as Coronavirus, is a new respiratory sickness which negatively damages a human being’s lungs and airways and which has now spread rapidly across the world (Coronavirus (COVID-19) – NHS, 2020). Therefore, as this is a contagious virus, national governments and political leaders – in line with the WHO advice – across the world have encouraged individuals to stay at home, impacting adversely the economy, with large and small businesses globally forced to shut their business down temporarily and switch to home and smart working. According to Wood and Sweney (2020), the COVID-19 outbreak has caused disruption and turbulent events to the majority of small businesses such as restaurants, nurseries, bars, and cafes.


Challenges to SMEs

As these small and medium businesses will not have the financial stabilities to their contingency plan, the UK Government has gone to the lengths to support them financially. According to ‘COVID-19: Support for businesses’ (2020), Downing Street has decided to implement the ‘Retail and Hospitality Grant Scheme’ providing businesses a grant of £25,000, in conjunction with the ‘Small Businesses Grant Scheme’, providing funds up to £10,000, and will also fund a ‘Temporary Coronavirus Business Interruption Loan Scheme’. Essentially, the government will help SMEs cover their costs such as supply costs, logistics and transportation, wages and facilities costs to mention a few.


With the British authorities’ support, depending on the SME's sales, they could either break-even in the short period, but for other businesses they will be left with huge debt and high cash outflow, jeopardizing the UK economy which could face a recession period. FSB Statistics (2020) suggests that “SMEs account for three-fifths of employment and around half of the turnover in the UK private sector”.


According to (News, briefings and growth, 2020), SMEs’ sales revenue contributed to 47% to the economy thanks to their high standards of efficiency and productivity and, as an outcome, their high sales within their business. In today’s scenario, business owners are now struggling with funds to pay their employees and are forced to implement cost cuts and reduce the workforce, increasing the risk of a recession of the UK economy. According to Pettinger (2020), the COVID-19 impact will make trade and stock markets dramatically fall, affecting exchange rates and interest rates.


Where does the COVID-19 outbreak leave the future of SMEs?


With the UK government supporting SMEs in order to prevent them from collapsing, any failure will lead to a financial crisis since SMEs account for a large portion of the UK economy. In the case of businesses left with a higher risk of a huge amount of debt, uncertainty and loss of employees and which are unable to pay takes, they can take legal action with HM Revenue and Customs to sign the ‘time to pay’ agreement, meaning it will not create debt for these businesses.


The government has also decided to rip business rates on businesses in the form of leisure, retail and hospitality, in particular, restaurants, coffee shops and hotels across the UK. Approximately, 45% of the business property in the UK will not pay any business rates. This will positively impact SMEs since they will not incur higher costs, the government will have the accountability of it and the economy could slump and face recession as this will cost the Brits £2.2bn. Lastly, the government will ensure that SMEs can claim sick statutory pay. However, this sick pay claim could only be up to fourteen days and amounts to £200 per employee.

Keely Rushmore states that if the government does not take drastic measures as soon as possible then the negative impact of coronavirus over businesses will not be temporary but will have a permanent consequence on the SMEs. These measures need to be clear, realistic, and concise. In a scenario of recession, SMEs will jump in value and could risk bankruptcy due to insufficient liquidity, insolvency in salary payments, and face a sales decrease. It is fundamental that businesses dwell on retaining a positive, healthy, and professional relationship with their customers. Also, job cuttings could ruin the organizational culture of the business and put more of a financial strain on the business.


Conclusion


To conclude, it is vital that the UK government assists SMEs for their financial stability throughout the COVID-19 outbreak crisis and beyond since it could lead to a recession. Uncertainty remains for the foreseeable future for small and medium-sized businesses.


References and Bibliography

  1. nhs.uk. 2020. Coronavirus (COVID-19) – NHS. [online] Available at: <https://www.nhs.uk/conditions/coronavirus-covid-19/#overview&gt; [Accessed 2 April 2020].

  2. Wood, Z. and Sweney, M., 2020. Coronavirus Shutdown Ravages High Street As Retailers Take Emergency Action. [online] the Guardian. Available at:<https://www.theguardian.com/business/2020/mar/20/marks-and-spencer-considers-temporary-store-closures-wetherspoons-coronavirus&gt; [Accessed 2 April 2020].

  3. GOV.UK. 2020. COVID-19: Support For Businesses. [online] Available at: <https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses#support-for-nursery-businesses-that-pay-business-rates&gt; [Accessed 2 April 2020].

  4. FSB, T., 2020. UK Small Business Statistics. [online] Fsb.org.uk. Available at: <https://www.fsb.org.uk/uk-small-business-statistics.html&gt; [Accessed 2 April 2020].

  5. News, e., briefings, E. and growth, B., 2020. Boosting UK Productivity With SME Growth – Economic And Social Research Council. [online] Esrc.ukri.org. Available at: <https://esrc.ukri.org/news-events-and-publications/evidence-briefings/boosting-uk-productivity-with-sme-growth/&gt; [Accessed 2 April 2020].

  6. Pettinger, T., 2020. Causes Of Recessions – Economics Help. [online] Economics Help. Available at: <https://www.economicshelp.org/macroeconomics/economic-growth/cause-recession2/&gt; [Accessed 2 April 2020].

  7. Study.com. 2020. [online] Available at: <https://study.com/academy/lesson/what-is-economic-recession-definition-causes-effects.html,&gt; [Accessed 2 April 2020].

  8. 2020. [online] Available at: <https://www.ft.com/content/ff00ec96-6481-11ea-b3f3-fe4680ea68b5https://www.ft.com/content/ff00ec96-6481-11ea-b3f3-fe4680ea68b5&gt; [Accessed 2 April 2020].

  9. 2020. [online] Available at: <https://www.ft.com/content/ff00ec96-6481-11ea-b3f3-fe4680ea68b5https://www.ft.com/content/ff00ec96-6481-11ea-b3f3-fe4680ea68b5&gt; [Accessed 2 April 2020].

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