As reported by the UK Government Business Population Estimates 2024, the UK is home to 5.49 million small and medium-sized enterprises (SMEs) which, at the time of the survey, represented 99% of the total business. Most of whom (5.45 million) are ‘small businesses’, where the number of employees is not exceeding 49.
SMEs are a critical component of the economy, generating 52% of turnover (£2.8 trillion in 2024) and employing 61% of the UK workforce. The dominant industries covered by SMEs in the UK are wholesale and retail trade (34% of SME turnover), construction (11%), professional, scientific and technical services (11%), manufacturing (9%) and administrative support services (9%).
To answer the title question – in short, yes, the SME market is growing in the UK. Since 2000, the SME population has grown by 59%, with 90% of SMEs reporting growth in 2024, at an average increase of 27%. Of the third of SMEs that prioritise research and development for growth, strategic investments in new technology like AI, automation and cloud computing are becoming central to plans for expansion. However, the SME sector has not been insulated from pressures. Pressures ranging from rises in operational expenses, along with talent shortages and post-Brexit alignments have also been major challenges for the majority of SMEs, with profitability being affected by the cost-of-living crisis and government policy changes after the 2024 elections. In this article, we will explore the SME market in depth, and recognise the resilience it has shown during times of economic uncertainty.
What are the main challenges facing SMEs today?
Despite all the reported growth, SMEs today are facing a number of key challenges that are necessary to deal with in order to continue thriving.
Some of these include:
Rising operational costs
SMEs are hit disproportionately by inflation, especially when raw material, energy and labour costs are soaring. For some firms, the cost of utilities has gone up by 20%, with increases of the same order for materials and other inputs. International crises such as the Russia-Ukraine war have exacerbated supply chain disruptions, which have translated into shipping cost increases and material shortages.
Talent acquisition & retention
With increasingly tighter labour markets, SMEs have struggled to attract skilled labour, added to pressure on wages and calls for increased pay. With technology racing ahead, companies are having to spend more on training employees just to keep pace.
Consumer spending slowdown
Reduced disposable income for consumers due to the cost-of-living crisis has been influencing spending behaviour. Revenues, especially in retail, hospitality, and services, have been limited, impacting future growth opportunities.
Regulatory pressure
Though not yet compulsory for SMEs, pressure is building to comply with environmental, social and governance (ESG) reporting expectations, especially from investors, banks and customers themselves. Additionally, tax policy changes and National Insurance contribution changes will only contribute to these issues.
Access to finance
Accessing finance has become more complex than ever, with many SMEs struggling to gain access to funding due to higher rates of interest and tighter lending conditions. This puts major limits on their ability to invest in growth or innovation.
If you are looking to secure financing, then this should be done with ample preparation to ensure that lenders will look on your business favourably.
SMEs should not wait until the last minute to secure funding. If you foresee a potential issue in your business, such as strained cash flow, it is crucial to get financing as soon as possible, before your business is seen as too risky.
Willem van Lynden, Founder of Rise Funding
How are SMEs adapting to these pressures?
There’s multiple statistics we can look at to view how SMEs have been adapting to the pressures outlined above. Here are some of the key approaches being taken:
Reducing inefficiencies
Optimising operations has become a key focus for SMEs in recent years. This includes operational audits, for regular reviews of production, delivery and administration processes to help identify areas where costs can be cut. Businesses are also renegotiating terms with their suppliers to secure bulk discounts or better prices. Due to the fragility of certain supply chains, we’ve also seen businesses start to diversify their supplier base to avoid dependency on single sources.
Financial discipline
SMEs are becoming more cautious in their financial strategies, in order to maintain liquidity. Weekly and monthly updates on cash flow projections are allowing businesses to anticipate any shortfalls, and manage their late payments. Cash reserves have increased by 3.2%, reflecting this shift in financial attitude.
Technology adoption
A crucial tool in improving efficiency, over two thirds of SMEs have automated at least one process in their workflow, like inventory management or customer service in order to reduce their labour costs and improve productivity. A particular focus has been on implementing e-commerce and digital payment solutions expanding their reach while reducing physical infrastructure cost.
Workforce management
Rising employment costs have caused SMEs to review their staffing and recruitment policies, instigating tighter employee training programs to achieve peak productivity and weighing the expense of higher wages against costs. They are also examining flexible working arrangements, where job sharing or part-time working allows businesses to retain staff and manage fluctuating demand.
Revenue diversification
In order to tackle the decline in consumer spending, and challenges to exports (like tariffs), SMEs are looking to target new customer segments in the UK market, compensating for a new lack of export competitiveness due to tariffs. This can be done by exploring complementary offerings, whilst leveraging existing capabilities.
Risk management
At a particularly economically uncertain time, proactive measures are being taken to prepare for sudden economic and geopolitical shifts. By modelling best, moderate and worst case outcomes for revenue and costs, quicker decision making can be implemented in volatile conditions. Many businesses are building emergency funds, to maintain a financial buffer against market upheavals.
Future outlook for SMEs in the UK
In the face of the challenges discussed, SMEs remain positively optimistic about the future, as the UK economy recovers from disruptions. The UK economy is expected to expand modestly, with the ONS recording expansion across all sectors of the UK economy in February 2025, much more than city economists had anticipated.
Surveys show 89% of SMEs are optimistic about growth in 2025 and 85% optimistic about their long-term prospects for the next five years. Nevertheless, increasing concerns such as the expanding economic disparity between regions will affect SME performance. Whereas high-value locations such as London will experience more dynamic growth, locations such as Scotland and the North East can lag behind because of weaker economic momentum – a sector to monitor closely over the next phase.
Conclusion
The SME economy in the UK is in solid health by any set of measures and has shown remarkable resilience and ingenuity in the face of an unprecedented set of economic and structural headwinds. From increased operating costs and skills shortages through to more stringent financial conditions and evolving customer behaviours, SMEs have had to adapt and reimagine in order to stay one step ahead. Leaning on technological uptake, financial conservatism and workforce agility, many have not just survived—but flourished.
With ongoing optimism among businesspeople and positive signs from the remainder of the UK economy, SME opportunities are healthy. But with regional inequalities and economic uncertainty still present, growth will not be everywhere. It will be important to support SMEs with targeted policy, access to finance, and inclusive economic planning if we are to sustain this growth and make sure that the SME sector can continue to be the lifeblood of the UK economy.
Caleb Hinton
Caleb is an experienced financial copywriter for Rise Funding, with a background in writing for banking, lending and payments.
