Multiple Cost Pressures Converge

Small businesses are facing a convergence of financial headwinds that threaten their viability. Payroll expenses are set to rise again in April with planned increases in the national living wage and the removal of exemptions on statutory sick pay, following last year's hike in employer National Insurance contributions expected to raise an additional £25 billion per year.

Business rates represent another significant burden. Retail, hospitality and leisure firms will face an average 52% increase over the next three years, according to the Federation of Small Businesses. These cost pressures arrive at a time when the broader economy remains lacklustre, with the Bank of England's latest agents' summary describing business conditions as subdued and contacts remaining cautious about growth prospects.

Insolvency Risks and Late Payment Crisis

The financial strain is already evident in elevated insolvency levels. UK firms were owed £112 billion in unpaid invoices at the end of 2024, while nearly half of all invoices are paid late, according to a recent House of Commons Business and Trade Committee report. Business distress is most evident in hospitality, particularly among SMEs facing weak demand and cost pressures, while construction firms and their supply chains are also showing signs of financial stress.

UK business insolvencies have broadly stabilised since 2024 but remain at an elevated level, with expectations for a decline through 2027 but insolvencies remaining above pre-pandemic averages.

Black Swan Risks Compound Uncertainty

Beyond immediate cost pressures, SMEs face growing exposure to high-impact disruptions. The threat of cyber-driven outages, geopolitical supply chain disruptions and potential financial market shocks is increasing, yet most SMEs remain underprepared to withstand them. This vulnerability comes at a time when economic and political uncertainty, alongside heightened cost pressures, have made businesses increasingly reluctant to invest in growth.

Limited Relief in Sight

While inflation is easing and some economic indicators show tentative improvement, the outlook remains challenging. Manufacturing and business services contacts continue to expect flat to modest pickup in volumes in the second half of 2026, but construction contacts have become more downbeat with expectations of recovery pushed out to 2027. Investment intentions remain weak, with firms maintaining spending primarily for refurbishment and efficiency improvements rather than growth-focused expansion.