The Top Challenges for UK SMEs in 2023

Office workers are well aware of their colleagues’ bad habits — from smelly food to dramatically loud sneezes.

The current upward trend in inflation, resulting in rising prices for materials and fuel purchased by British manufacturers, means that 2023 could be a challenging year.

We discussed with Payrow, a British fintech company that provides financial services for SMEs and startups in the UK, what could happen and received an idea of how to adapt and thrive in a changing environment.

The Influence of Economic Uncertainty

The two impactful events that everyone knows about are the ongoing consequences of Brexit and the imprint left by the pandemic. Together, these factors meant strong economic uncertainty, manifested in the fact that no one could define for sure which losses they had incurred and which changes they were waiting for. This is especially noticeable in terms of intangible losses and opportunity costs.

In terms of economic changes, fluctuations in exchange rates, tariffs and trade rules make it difficult to maintain stable operations of enterprises, especially those that depend on imports and exports. SMEs should focus on building sustainable supply chains, diversifying their markets, and asking for expert support in navigating the complexities of international trade.

Fuel costs, labour shortages, disruptions in global supply chains and high taxes are likely problems for British businesses next year. The survey conducted with 300 British SMEs showed that almost a third have postponed expanding their workforce this year, two-thirds (67%) have delayed plans to improve business energy efficiency, and 17% have suspended improving heating.

The increased cost of living is also a barrier to development. Foremost, it has a huge impact on consumer sentiment and spending, forcing businesses to cope with this by lowering prices to increase competitiveness and constantly monitoring changes in supply and demand. At the same time, combining product price cuts with higher inflation, the need to raise employee salaries and pay taxes is also a challenge. In simple words, SMEs are under constant pressure, which they need to overcome.

Access to Finance as a Challenge

Access to funding remains a challenge for British SMEs. According to Payrow, traditional UK banks are now more risk-averse due to economic uncertainty, resulting in their unwillingness to provide loans for small businesses.

According to Business Leader, in 2022, British SMEs invested an average of £565,000, which was £145,000 less than the planned investment mark. This year, the planned investment of £710,000 may also not be reached due to the unstable economy.

When lending money becomes less affordable, SMEs explore alternative financing options, which are, by definition, riskier (peer-to-peer lending and crowdfunding) or require a lot of time and red tape (government-backed schemes). But still, there are opportunities to get money to support small business growth.

How to Attract and Retain Talents

Attracting and retaining qualified employees is one of many pressing issues facing British small and medium-sized enterprises. Since the labour market is becoming increasingly competitive, SMEs are struggling for the best talent, and it’s often difficult for them to match the salaries and benefits offered by large companies.

Like many challenges from the list of what businesses have to deal with in 2023, the problems of personnel leakage and talent search are solvable. To attract people, if a company cannot offer big salaries, it’s worth offering an alternative benefit. SMEs should focus on creating a strong and positive corporate culture with clearly stated values and norms that an employee will experience.

To be more precise, a small business could offer greater flexibility, professional development opportunities, a comfortable working environment, well-managed communication, and other non-monetary incentives that will attract and retain skilled workers. It’s advisable to look for what people value in their work and try to offer that.

How to Comply with Changing Regulations

It’s the responsibility of all businesses to comply with the laws when carrying out activities in a certain jurisdiction. Since laws change according to economic or political necessity, businesses are forced to adapt. For small businesses, this can be a challenge for various reasons, including lack of experience, limited staffing, and the absence of qualified layers to guide them.

Let’s look at a real-life example. SMEs face difficulties on the way to reducing carbon emissions, with many of them reconstructing their infrastructure. Naturally, this can be expensive. It’s not surprising that by January 2022, only 22% of small businesses had plans to invest in Net Zero over the following 24 months. Inflationary pressures further diminish small businesses’ ability to contribute to this initiative, with 46% citing insufficient budgets and high costs as the most significant difficulties they face in reducing emissions.

Digital Transformation and Cybersecurity

Technology continues to evolve, so digital transformation has become a necessity for businesses to remain competitive. And here comes one more challenge: innovation is costly and time-consuming. SMEs need to invest in digital infrastructure, including cloud computing and data analytics, to improve customer service and overall performance.

To adapt to the new business environment, they need to implement e-commerce platforms and digital marketing strategies. This way, small businesses can expand their coverage and compete with larger companies. However, opening a marketplace and creating a website is not as easy as it may seem. It won’t be difficult to outsource such a project to an IT firm, but maintenance, updating and security also need to be considered.

Сybercrime has increased by 600% as a result of the pandemic. The ever-evolving cyber threats cause concerns, forcing SMEs in the UK to prioritise cybersecurity and safeguard their digital assets and customer data.

Due to limited resources, SMEs often face challenges in investing in digital infrastructure and implementing comprehensive cybersecurity measures. This is one of the reasons why fintech companies like Payrow are emerging, as they help small and medium businesses automate various business processes, secure their finances, and do not require significant investment in their services.