Political parties must take the needs and challenges of SMEs seriously if the UK economy is going to achieve its growth ambitions – especially as many of these firms cut protective insurance cover to reduce costs

By Mike Edgeley

The starting pistol has fired. The general election race is on.

Mike Edgeley 2023

Mike Edgeley

As the political parties try to differentiate themselves, there is a tendency to announce attention-grabbing policies with, sometimes, little substance to show how they would actually be implemented.

The country is still suffering from recent examples of these from the Conservative party, such as the famous Boris Johnson strapline that the country would save £350m a week by leaving the European Union, or Liz Truss’ announcements of substantial tax cuts at a time when economists were stressing caution.

Last month (May 2024), current prime minister Rishi Sunak announced a National Service scheme, featuring a commitment to either 12 months in the military or a community volunteering component.

Labour leader Keir Starmer, meanwhile, has unveiled a pledge card with six key policies as part of his first steps towards his five missions, one of which is to make the UK the fastest growing major economy by the end of a first term in government. A bold statement, but I’ve not seen a huge amount of detail that sits behind it.

So, what do Starmer’s six policies commit to? Tough spending rules, green energy, cutting NHS waiting lists, border security, neighbourhood policing and teacher recruiting. Not a lot about growth.

And yet, what is the key challenge we face? Surely, it is that the UK has been one of the slowest growing economies that doesn’t have the money to spend on these policy initiatives without significant further borrowing.

In May 2024, intergovernmental body The Organisation for Economic Co-operation and Development forecast that the UK will be the worst performing economy in the G7 next year.

Stripped back support

So, where does this leave small and medium-sized enterprises (SMEs)?

SMEs, like many UK businesses, have faced challenging macro headwinds post-Covid, post-Brexit and in a recent era of significantly higher interest rates, which has translated into higher debt servicing costs. For SMEs that are more sensitive to changes in interest rates, this has created financial strain.

The Federation of Small Businesses acknowledged that SMEs account for 61% of employment and half the turnover in the UK’s private sector.

In contrast, large enterprises represent less than 0.1% of the total number of businesses and employ 39% of the private sector workforce. SMEs, therefore, are vital to both the UK’s growth aspirations and employment.

Business owners in the SME sector are the risk takers, the entrepreneurs and innovators. Approximately one-third of SME business owners provide a personal guarantee when securing funding, according to financial services firm Got Capital. Despite this, incentives for entrepreneurs who take these risks are often under attack.

The government scaled back Entrepreneurs relief in the 2020 budget, relating to the 10% capital gains tax (CGT) lifetime allowance for small business owners.

Now named Business asset disposal relief, the original lifetime limit of £10m was scaled back to £1m. Changes to CGT never seem to be far away, while IR35 places a further burden on SMEs in particular.

Insurance implications

In the insurance sector, we deal with the challenges facing SMEs on a daily basis.

On a policy basis, most commercial brokers will be predominantly SME in their book makeup. While some SME sectors are buoyant, the rate of insolvencies appears to feature more prominently.

Government websites and debt agency statistics tend to agree that in 2023, over 25,000 companies declared themselves insolvent – the highest number since 1993.

Surveys of SMEs typically rate the impact of cost of living on their cost base, funding, talent acquisition and cyber as key concerns. And yet, worryingly, more and more SMEs look very critically at their insurance cover with a view to reducing costs.

This can lead to underinsurance, potential exposure to claims being repudiated, average clauses being applied and exposure to cyber attacks, which – if successful – could be enough to cause a business to close.

While the common belief is that cyber criminals target larger and wealthier businesses, it is the broad and indiscriminate nature of phishing attacks that leaves SMEs exposed because they tend to have weaker security. The low take-up of cyber cover by SMEs is a feature many brokers struggle to resolve.

SMEs should form a significant part of any new government’s plans to drive growth.

They take a disproportionate amount of risk, employ the majority of the workforce in the private sector and contribute to over half of the private sector’s turnover. If we genuinely want a country that inspires and supports entrepreneurship and innovation as part of its future growth ambition, then this sector needs more support and attention.

So, if Keir Starmer genuinely wants to create the fastest growing major economy by the end of a first term, it would be quite nice to hear how that’s going to happen. The same question applies to Rishi Sunak.

In the meantime, I’ll break the news to my nephew that he needs to get measured up for a new uniform.