New report provides deeper understanding of challenges faced by small businesses

Small businesses play a pivotal role in the global economy as engines of innovation and job creation. Despite their critical importance, the insights needed to fully understand the health and challenges of small businesses have been in short supply as small businesses are not very well represented in common data sets.

Until now. 

The Intuit QuickBooks Small Business Index Annual Report, developed in collaboration with leading global economist Professor Ufuk Akcigit and his co-authors, provides a comprehensive analysis of the small business landscape in the UK, Canada and the US.

This inaugural report, which utilizes three different data sources, examines how small businesses are navigating recent macroeconomic conditions. It uncovers certain factors that led to declines in small business employment in 2023, even as overall employment levels have been increasing. These include small businesses' sensitivity to the effects of inflation and rising interest rates, creating limited funding access and growth. The report analysis also delves into the impact of digitization and illustrates how small businesses are using digital tools such as accounting software, apps, and e-commerce to manage their business.

Small businesses play a critical role in economies

The rise of the “solopreneur” (non-employer businesses) shows entrepreneurship is stronger than ever. However, in the US and Canada fewer new businesses are creating jobs, a concerning trend because in the US, more than a third of all jobs are with small businesses while in Canada and the UK it’s more than two in five.

Small businesses play a pivotal role in job creation, but they are under pressure. The report shows negative small business employment growth in the UK, Canada, and the US during the first half of 2023 following interest rate increases.

This Annual Report reveals that the inflationary environment and the rising interest rates have contributed to this by increasing the cost of production and limiting access to funding. If small businesses aren’t hiring, they’re spending more time running their business than managing it.

Hurdles in funding small businesses

Access to funding is essential for small business growth – what’s more, access to capital can help them hire. But, according to the survey data, securing funding is still a persistent hurdle. New businesses and businesses owned by women or members of underrepresented racial groups often face greater funding challenges.

Roughly half of small businesses in the UK, Canada and the US are self-funded by their owners (48% in the UK, 51% in Canada, 58% in the US) – often by working other jobs.

Only one in five of the respondents said that they have received funding from a commercial lender since they established their business for funding.

Inflation and interest rates creating unique challenges

Compared to pre-pandemic levels, average monthly credit card spending is up by an average of 20% – creating potential vulnerabilities. At the same time, monthly credit card payments made by small businesses are 26% higher, on average, than before the pandemic. With elevated inflation and high-interest rates, small businesses have increasingly depended on their credit cards.

Having a diversity of funding options would mean small businesses can reduce the burden of extra costs in today’s high-interest environment.

Going digital to improve resilience

Delving into the importance of digitization, the report examines how small businesses are using digital tools such as social media, e-commerce, and accounting software. The report finds a correlation between higher use of digital tools and better business performance, including revenue and workforce growth, which provides optimism for their future performance.

For example, UK small businesses using eight or more digital tools to manage different areas of their business are almost twice as likely to report revenue growth. Meanwhile, in the US, the growth figures for the same group are the same and they’re almost three times more likely to have expanded their workforce over the 12 months prior to April 2023, than small businesses using just up to two digital tools.

Charlene Nevin - Inuit QuickBooks customer, and founder and owner of H2B Toys - noted: “Everything we do in our business is digital. I absolutely believe that digital is the future. Social media is the digital tool that has had the biggest impact on our business. We use a social media trends app that helps us identify the biggest social media trends happening that day, so we can jump on those. Artificial Intelligence (AI) helps us SEO-up any of our social media content – this really helps when I’m not feeling particularly creative. Alongside these, we also use a digital financing tool, helping us keep track of stock and sales in a fast and efficient way.”

Encouraging the adoption of digital tools through scaling government resources in a way that helps small businesses modernize their operations is key. Digitization can be a resource — helping to both keep small businesses that aren’t hiring running efficiently, and to support the businesses that are growing.

Big, actionable insights

Powering prosperity for small businesses starts with data — and ends with action. Professor Akcigit, who developed the report in collaboration with Intuit QuickBooks in the UK, Canada and the US, said: “The ambition is that policymakers, accountants advising their small business clients and entrepreneurs starting and running small businesses will be able to draw valuable conclusions from this in-depth analysis. Ultimately, this report underscores the importance of fostering an environment conducive to the success as well as the resilience of small businesses.”

For more insights, check out the Intuit QuickBooks Small Business Index Annual Report.