It’s survival of the fittest for UK small businesses

11 January 2016

2 min read

UK business start-up rates are increasing, but new research indicates that more than half of all start-ups don’t last beyond five years.

It’s survival of the fittest for UK small businesses (Desktop)

It is easy to be cheered by the rising start-up rates in the UK, with successive data suggesting more new businesses are being formed than ever before.

There were 581,000 start-ups created last year, according to the Centre for Entrepreneurs think tank. This year is expected to break all records, with more than 600,000 expected to launch.

But focusing too closely on start-up formations can be misleading. It’s very easy to launch a venture – registering a new company takes minutes. But staying in business, surviving those first few years, that’s the real test.

At the end of November, the Office for National Statistics released its data on the business births and deaths from 2013 to 2014. It found that the number of UK business births rose by 1.2pc from 346,000 to 351,000, the highest since records began.

But look at the death rate: the number of UK businesses that went to the wall increased by 3.5pc between 2013 and 2014, from 238,000 to 246,000.

Survival rates have been consistently lower in recent years than before the financial crisis, research by the British commercial insurer RSA suggests. More than half of new businesses don’t survive beyond five years, with the tax system, lack of bank lending and the cost of running a business cited as the top reasons for failure by the entrepreneurs polled.

But the trend may be reversing slowly. Looking at the ONS data, the rate of business births has fallen by 0.4pc while the rate of business deaths has fallen by 0.1pc.

The new analysis published by Creditsafe found that Berlin was significantly outpacing London, Paris and Brussels when it comes to the growth in active companies.

Berlin has witnessed a 22pc surge in the number of active businesses in the past 18 months, significantly ahead of Paris (14pc) and London (9pc) – Brussels saw a contraction of 0.7pc

London may be producing fewer start-ups but its survival rates are outstripping its rivals. In the past 18 months, London had a business failure rate of just 0.39pc compared to Berlin’s 0.75pc. In Paris, business failures reached 2.95pc and in Brussels, 3.15pc.

There were 37 fewer active companies operating in Brussels at the end of the first half of 2015 than at the start of 2014.

London does not reflect the situation in the whole of the UK but it's an interesting study.

Start-up rates alone should not be used to determine the health of the entrepreneurial economy. We must make sure that survival rates are factored in. New companies are not generating value for the UK if they don’t grow and can’t employ staff. They simply join the ranks of zombie companies, kept alive by low interest rates.

Start-ups may sound exciting, but it’s the survivors who are truly worthy of our attention.

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