Why are SMEs failing to scale-up?

The UK enjoys one of the best start-up rates for business in the developed world.

However, this success is not replicated when it comes to scaling-up new or small businesses – the UK is only 13th for doing so among OECD (Organisation for Economic Co-operation and Development) nations.

Businesses need an independent, trustworthy, reliable source of information to help inform finance decisions. If businesses aren’t aware of the options, or worse still don’t know where to look to find out about their options, then clearly there is little hope of successfully up-scaling the business.

One such source of information is Informi, a website that helps guide and facilitate small businesses. Informi is completely free to use and provides a range of comprehensive, straight talking guidance on all aspects of running a business from starting up, marketing and legal advice through to management guidance (for yourself and others), business administration and of course, scaling-up. This includes sources of financing ranging from grants to bank loans to crowdfunding.

The site was established by AAT a few months ago to meet one of our key charitable objectives: to advance public education. It has already attracted tens of thousands of visitors, demonstrating its worth as a useful free resource.

Another much commented on area of concern is the British psychological approach to business success and scaling-up: the almost uniquely British problem of entrepreneurs selling up instead of scaling-up.

Selling to bigger foreign companies, like in the recent case of ARM holdings, is often criticised but when profits are taken and ploughed into new businesses then surely this is to be encouraged. The problem is that profits from business sales – taken at the earliest opportunity rather than after 10-15 years of growth – are often taken and retirement to the golf course follows instead.

The availability of patient capital (long-term investment in innovative firms who want to build large-scale businesses) presents another challenge with an estimated £4bn shortfall in the UK. Short-termism, a lack of awareness and the regulatory system are three often stated barriers to the availability of patient capital but as AAT set out in our response to the Government consultation on the subject last month, there are positive signs emerging in each of these areas.

Government also needs to explore the manner in which funding for scale-ups is deployed with several billion pounds being invested in London and the South East per annum but only a fraction of this in the rest of the country. In contrast, according to the UK Start-Up Institute, 8 out of 10 of the UK’s most productive businesses are located outside London.

Finally, the quality of management is a real barrier to scaling-up. The UK has a tremendous track record in starting up new businesses, a terrible record at maintaining these businesses and an even worse record at scaling-up those that remain. It therefore comes as little surprise that the quality of management is consistently identified as a contributory factor to this situation.

Almost half of all new businesses fail within three years. The Chartered Management Institute found that bad management was to blame for 56% of these failures between 2011-2014. If SMEs cannot survive the first three years then clearly they cannot scale-up but what about those that do survive, why are they not capable of scaling-up? It’s not just about funding or psychological barriers but management skills too.

SMEs could and should make greater use of business expertise and knowledge available from University business schools across the UK, especially the many that have gained the Small Business Charter. They should also consider utilising the resources available from the Chartered Management Institute, including qualifications where appropriate.

Put simply, there are substantial resources out there, we need to increase business awareness of their availability and worth to combat what remains a persistent problem.

These are exactly the arguments AAT will be making at the Conservative Party Conference next month when AAT Chief Executive Mark Farrar will join the Chief Executive of the Chartered Association of Business Schools and the Small Business Minister Margot James MP, to discuss how the UK can best meet the scale-up challenge.

Phil Hall is AAT's Head of Public Affairs and Public Policy.