Potential reasons as to why businesses in the UK are struggling:
Every day sees a new headline in the media about the plight of UK business. It seems as though the UK economy is held back by economic uncertainty and constant pressure from cost of materials and labour. Limited access to funding and cost of living crisis add to challenges businesses face. To manage these pressures, businesses can explore different funding options, focus on cash flow management and strengthen supply chains.
Rising costs: inflation, wages, and taxes:
For many micro and small businesses, the main challenge is rising costs, particularly the increasing price of services and energy. As the cost of living rises, the prices of raw materials, machinery, goods and services also increase. Businesses that rely on imported goods face even higher costs due to global price increases and fluctuating exchange rates. Domestic suppliers also raise prices as their own costs rise, which then creates a chain reaction effect throughout the entire supply chain. As a result, many companies see their profits decrease leading to cash flow difficulties, unless they increase their own prices, which is often difficult in a competitive market.
Wage prices also relate to these issues. As cost of living increase, employees expect higher pay to maintain their standard of living. The cost of employing staff is set to rise in April 2025 due to increases in the National Living Wage and higher National Insurance contributions for businesses. These higher payroll costs can reduce profits and limit UK business growth. In recent years, UK companies have had to raise wages on multiple occasions. If businesses fail to increase wages, they risk losing staff to other employers, worsening recruitment difficulties, and lowering productivity. With inflation also pushing up labour costs, businesses are under financial pressure from multiple directions.
Higher interest rates, which are used to control inflation, creates more difficulty for businesses. When the Bank of England raises interest rates, borrowing becomes more expensive. This in turn affects UK businesses with existing loans or overdrafts as their debt repayment rises. As a result, many companies find it harder to invest in growth. Additionally, it also prevents new borrowing, making it more difficult for companies to make investments. Small businesses and start-ups are particularly vulnerable to the economic uncertainty since they often rely on other funding. Many are forced to delay or cancel investment plans, which slows innovation and reduces overall economic competitiveness.
Reduced consumer spending:
When people spend less, it impacts struggling UK businesses as their revenue decreases. When households face rising cost of living, higher interest rates or economic uncertainty, they cut back on non-essential purchases and often switch to cheaper alternatives for essential items. This fall in demand means fewer sales and lower average transaction values, which makes it difficult for companies that already operate on thin profit margins. As sales decline, businesses lose the cash flow they rely on to cover day-to-day expenses.
The decrease in spending is particularly harmful as UK businesses' fixed costs remain fixed. Rent, wages, utilities, and insurance must still be paid, regardless of how much revenue comes in. Small businesses often cannot increase prices without risking the loss of customers, so they are forced to absorb rising costs while their customers have less money to spend. Over time, this pushes businesses into financial difficulty. When companies find it difficult to pay suppliers or invoices on time, cash flow problems worsen and some turn to short-term borrowing, which is expensive due to high interest rates.
Increased cost of borrowing:
Higher borrowing costs make it much more expensive for UK businesses to access credit, which many rely on for everyday operations and growth. Borrowing is often necessary to manage cash flow and cover immediate expenses. However, rising interest rates increase repayment costs at the same time as bills for energy, labour, and raw materials remain high. This creates financial pressure even for companies that are otherwise stable.
Across the wider UK economy, higher borrowing costs also discourage company investments. Companies become less likely to take financial risks, expand, or invest in innovation, technology or hiring when borrowing costs rise. This slows productivity growth and makes UK firms less competitive compared with countries where borrowing is cheaper. Start-ups, which usually rely on financing to get started, are hit especially hard. As investment drops, business performance weakens, growth slows, economic uncertainty increases and opportunities decline, creating a cycle that leaves the UK business environment more fragile.
Cash flow pressure:
Cash flow pressure affects UK businesses by making it harder to cover everyday operating expenses, even when they appear profitable. Many companies rely on a steady flow of incoming payments to pay for goods and services. However, when cash flow slows due to late payments, falling sales, or rising costs, businesses are left with less liquidity. This means they must cover essential expenses without enough money available. As a result, businesses may struggle to buy the goods that they need to continue trading or fall behind on overhead payments. This increases the risk of financial instability, and disrupts normal operations.
Cash flow pressure also raises the overall cost of doing business. Companies frequently use overdrafts, short-term loans, or financial tools that become more expensive during times of high interest rates to fill the gap when they are short on cash. In addition, suppliers may tighten payment terms or demand upfront payment particularly in times of economic uncertainty, if they see a business struggling to pay on time. This has an effect for many UK businesses, especially in industries where payment delays are common.
Overall, a combination of declining consumer spending due to the rise in the cost of living, rising borrowing costs, and ongoing cash flow challenges are severely impacting UK businesses. As interest rates rise and essential costs keep increasing, demand falls, reducing revenue and leaves companies with very small profit margins. These cash flow pressures along with the ongoing economic uncertainty make it harder for businesses to operate efficiently, creating a cycle of financial stress that weakens long-term stability. Together, these factors have created a challenging environment in which many UK firms struggle to survive, leading to higher business closure rates and slower economic growth across the country.
