Millions of households have seen their energy prices and the cost of daily goods increase in recent months and in the private sector SMEs are facing similar challenges.
The current national energy crisis has been described as an “existential threat” to SMEs by the Federation of Small Businesses (FSB) and, with no price cap to protect them, almost two-thirds are spending 20% of their business costs on energy.
According to a survey by SME payments company Tyl, which is part of NatWest Ventures, 54% of UK small businesses are spending more than £3,000 on their annual energy bills. Unsurprisingly, this is having a big impact on the ability of these businesses to grow, with many now focusing on survival.
On top of this, small businesses are having to contend with the highest inflation rate in almost 30 years and the looming hike in employers’ national insurance contributions, which are set to increase by 1.25 percentage points in April.
FSB national vice-chair Martin McTague says: “Inflation is hitting small businesses hard, with over three-quarters telling us their cost of doing business has risen and is acting as a barrier to growth. Spiralling energy costs are causing widespread difficulties, especially for micro-businesses of fewer than 10 employees, who face many of the same challenges as consumers when it comes to negotiating energy deals but without the same protections.
“Add in the planned rises to national insurance and to dividends tax, due in April, and there is definitely reason to be concerned. The chorus of voices calling for the jobs tax hikes to be scrapped is rising – now we just have to hope the government is paying attention.”
The trade body is not alone in voicing its concerns. The Institute of Directors’ chief economist Kitty Ussher claims that the upcoming rise in employers’ national insurance contributions represents a “real and genuine concern to business leaders, particularly those running small and medium sized businesses that are the growth engine of our economy”.
According to the institute’s research, many businesses are trying to find ways to offset their rapidly rising costs, with 38% looking to raise prices and 19% considering cutting staff numbers. McTague adds: “Small businesses are tough, adaptable and resilient, but they’re definitely up against it at the moment.”
How have small businesses responded?
One business navigating these rapidly rising costs is Scottish confectionery and online gifts business Bradfords Bakers. Its managing director, James McGoldrick, says his business is facing “astronomical” shipping costs, including a doubling in the price of some items the business imports from China, and an increase in gas and electricity prices, which he claims are “rising at a phenomenal rate”.
McGoldrick says: “We would normally get a set rate for our energy prices over a three-year period but you can’t get a price quoted at the moment, you have to accept that the costs are going to be variable and probably quite considerable.”
The current energy crisis is also impacting Bradfords Bakers’ UK-based suppliers, which have warned McGoldrick of further price increases for their products. The business has already experienced a rise in costs of between 7% and 15% and so is likely to have to raise its prices - the second increase in recent months.
The business has also started bulk purchasing certain items in order to keep costs down, but McGoldrick admits this is not preferable for a business of his size. “You don’t want to be in a situation where you’ve brought product in that you then can’t sell,” he says.
A successful sales period in 2019 means the company is able to absorb the cost rises it has faced so far. But McGoldrick adds: “The energy costs are now starting to take effect, so we’d like to see the government step in and cap it to help the economy and prevent other SMEs from going out of business.”
What support is available for SMEs?
With global energy markets and supply chains so volatile, it is hard to know the best course of action to take. On energy, commercial, fixed-rate tariffs may offer the best security but with gas prices soaring many are now quoted at current rates, meaning businesses are unlikely to save by switching.
Ed Whitworth, head of energy performance at business comparison site Bionic, advises that “it’s probably best to sit tight until prices come back down to a reasonable level”. However, it’s difficult to predict when this will be, with the chief executive of Centrica recently suggesting that high gas prices could continue for the next 18 months to two years.
The challenges facing business mean the government is coming under increasing pressure to alleviate some of the costs. The British Chambers of Commerce have called on the government to reconsider the planned increase to national insurance contributions to help reduce the current squeeze on businesses, warning that it could place a “stranglehold” on the country’s economic recovery.
Whitworth adds: “The government is coming under pressure to step in and help customers by way of a VAT cut or a lowering of other charges not directly linked to the wholesale price of energy, but the only way that business owners can currently shield themselves from out of contract rates and any potential future rises is to lock in existing rates as soon as possible.”