Business numbers up as jobs are lost

The number of British businesses is poised to hit record levels at the end of this year as a result of the recession, according to David Storey, an adviser to the government on enterprise trends.

The director of the Centre for Small and Medium-Sized Enterprises at Warwick Business School said waves of redundancies were swelling the ranks of “necessity entrepreneurs”, who set up businesses because they have few other economic options. Prof Storey’s forecast was triggered by publication on Monday of a detailed demography of UK business by National Statistics. This showed that the number of active businesses with turnover above the value added tax threshold reached 2.3m at the end of 2008, the most this decade.

The UK business stock is routinely estimated at 4.8m, but this includes many tiny enterprises with sales of less than £68,000 a year.

The academic’s prediction will surprise some commentators, including bankers, who had expected business numbers to drop steeply in the recession.

However, Prof Storey, who is conducting a separate statistical analysis for the Department for Business, said: “Broadly, we expect the business stock to rise this year.”

Business creation rates were climbing steeply, he said, in response to unemployment. However, many people setting up small companies or embracing self-employment would fail because “there is less customer demand and fewer resources at the disposal [of entrepreneurs] because of falling house prices and limited bank lending.”

An unemployed factory worker might, for instance, invest a redundancy pay-out in a franchise, such as a mobile car repair business. Figures from the British Bankers’ Association show that an average of 47,500 small businesses set up new bank accounts every month of this year up to October. The monthly average during 2008 was about 43,800.

National Statistics provides comfort for struggling start-ups by revealing that closure rates are better than urban myth suggests. It is often claimed that 80 per cent of new businesses fail in five years. According to Business Demography 2008, the real rate is about 53 per cent.

Most closures do not involve catastrophic financial failure, according to Julian Frankish, a senior economist at Barclays. “People often set up a business with high hopes and find that it does not meet their objectives,” he said.

“But that is not the same as failing.”

Only 34 per cent of hotel and catering businesses kept going for five years, National Statistics found. While setting up a little bistro has traditionally been a pipe dream for stressed corporate executives, it is hard to make a success of it. Barriers to entry are low and competition is intense.

Conversely, healthcare businesses, such as private clinics and nursing homes, have a five-year survival rate of 63 per cent, reflecting high barriers to entry and rising demand.

Sectorally, the largest number of new businesses, 54,000, were created in the professional, scientific and technical category. “This is a significant trend for economy,” said Karl Barnfather of Withers & Rogers, the patent lawyers.

Mr Barnfather pointed out that technology businesses were being promoted as a key to recovery “but while British industry is very innovative, it does not always invest enough in protecting its intellectual property.”
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