What economic challenges are UK small businesses facing?

Running a small business has never been easy. But in 2025, UK entrepreneurs face a particularly tough landscape. Rising costs, tightened funding, and economic uncertainty are making it harder to plan, invest, and grow with confidence.

Some things are moving in the right direction – like inflation, which has come down from record highs. But it hasn’t yet returned to normal, and many other pressures remain unpredictable. The good news? By understanding the challenges more clearly, you can begin to prepare more effectively.

In this guide, we explore seven key economic challenges in the UK today and explain how they’re affecting small businesses in real terms. We’ll then give you some practical ways to respond.

1. Rising costs: inflation, wages and taxes

For most small businesses, the most immediate challenge is rising costs. Even though inflation is no longer at its 2023 peak, it remains above 3.5%, mainly driven by the cost of services and energy. And these aren’t abstract numbers – they’re real, everyday costs for heating your premises, running vehicles, or hiring contractors.

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Add to this the increase in the National Living Wage in April 2025, plus higher National Insurance contributions for employers, and the result is a significant increase in the cost of employing staff.

Unsurprisingly, a survey by the British Chambers of Commerce in early 2025 found that more than half of small businesses expect to raise prices this year to keep pace with rising costs. Yet many worry about losing customers if prices climb too high.

The result is shrinking margins, with businesses in hospitality, retail, and travel particularly hard hit. According to Begbies Traynor’s Red Flag Alert report, up to 50,000 firms now face potential closure, primarily due to soaring overhead costs.

2. Access to finance: why borrowing feels out of reach

If you’ve tried to borrow money for your business recently, you may have noticed it’s not as easy as it used to be. Even though the total amount of lending in the UK has increased slightly this year, fewer small businesses are applying for loans.

Why? First, borrowing is expensive due to high interest rates. The Bank of England base rate is still around 4%, and while it is expected to drop slightly by the end of the year, it makes loans, overdrafts, and credit cards more expensive for small businesses in the meantime.

Second, many small business owners don’t believe their loan applications will succeed, or are discouraged by the terms on offer. Between mid-2023 and mid-2024, the number of SMEs using external finance dropped from 50% to 43%. For startups in particular, traditional bank loans often aren’t an option. And while alternative finance options – like crowdfunding, peer-to-peer lending, or startup grants – exist, they can take time and effort to access.

What’s causing this funding gap? Part of the problem is structural. In countries like Australia and the US, pension funds and other large investors are used more effectively to support business growth. In the UK, this capital often doesn’t reach newer businesses, leaving many founders without the financial backing to grow.

If you need funding, take time to explore lesser-known funding routes. Some may offer terms more tailored to your business size and growth stage than high-street banks. Look into government-backed grants, regional funds, or specialist lenders who understand your sector.

3. Late payments: when waiting costs too much

Chasing unpaid invoices has always been frustrating. But in 2025, late payments have a bigger impact than ever, mainly because everything else is so tight.

More than 60% of small businesses are paid late by bigger companies. And that’s no minor nuisance: late payments cost UK SMEs an average of £22,000 a year in delayed working capital.

When you’re waiting to be paid, you can’t pay your own suppliers on time, invest in stock, or cover staff wages without dipping into reserves or credit. And in tough economic times, this kind of delay can be the tipping point.

Fortunately, there may be a change on the horizon. The government has introduced new rules that require larger companies to publish their payment practices, and aim to shorten payment terms to a maximum of 45 days. These measures are intended to help, but they’re still rolling out, and many small businesses are yet to feel the benefits.

4. Hiring challenges: skills shortages and rising wages

Hiring has become harder and more expensive. Even though unemployment is rising slightly (to around 4.7%), many businesses struggle to find the right candidates.

According to the SME Skills Horizon 2025 report, 90% of SME owners are experiencing skills gaps this year, especially at entry level and in specialist roles like engineering or logistics. While retention worries have eased, finding new talent remains a major hurdle.

If you’re a small employer, you might face tough choices: pay more to hire, or ask your existing team to do more with less. To attract and retain talent, many small businesses are advertising freelance positions, revisiting their employer brand, and offering perks like remote flexibility or on-the-job training.

5. Digital and cyber gaps: risk and lost opportunity

Many small businesses are missing out on digital tools that could save them time and money, mainly because they don’t have the resources, knowledge, or capacity to implement them.

For example, only 29% of SMEs use data to guide strategic decisions. While cybersecurity risks are increasing, many small businesses lack dedicated protections against threats like phishing, ransomware, or data breaches.

So what’s the cost of doing nothing? Lost time, for one: manual tasks that could be automated drain hours from your day. And higher costs, too – inefficient systems mean more admin, frequent errors, and missed opportunities.

6. Sector-specific pressures: retail and hospitality

While economic uncertainty affects all businesses, some sectors are bearing the brunt, especially those that rely heavily on physical premises, footfall, and tight profit margins. Take retail. High streets across the UK are under intense pressure: last year alone, almost 13,500 shops closed, according to the Centre for Retail Research.

Meanwhile, hospitality and leisure businesses face their own uphill climb: energy costs remain high, and insurance premiums have jumped significantly, particularly for high-risk businesses. Many of these companies run on slim margins at the best of times, and in 2025, those margins are under severe pressure.

For small business owners in these industries, staying afloat means quickly rethinking everything from staffing patterns to pricing models.

7. Trade challenges: tariffs and beyond

For UK businesses that trade internationally, tariffs and global instability make trade riskier and more expensive. In 2025, new US import tariffs – including a general 10% duty and higher rates on steel, aluminium and agricultural products – have raised costs for exporters. Over half of UK SME owners say these tariffs have reduced their appetite to export, citing squeezed margins and payment delays.

Beyond tariffs, rising tensions in areas like the Middle East and Taiwan add fresh uncertainty to global supply chains, causing delays, raising shipping costs, and making delivery times harder to guarantee. For small businesses that import stock or rely on international suppliers, this means having a clear picture of where risks lie and where alternatives might be needed.

How to respond: practical ways to adapt

The economic challenges UK businesses are facing in 2025 are serious, but they’re not unmanageable. Across the country, small business owners are finding ways to adapt. Here’s how you can respond to today’s pressures:

1. Stay on top of your cash flow

With rising costs, late payments, and borrowing challenges all putting pressure on liquidity, cash flow management is more critical than ever. Use accounting tools like Xero, FreeAgent, or Float to track income and expenses, plan for slower months, and anticipate cash shortfalls.

2. Plan for funding

Don’t wait until you need money to explore your options. With interest rates still high and lenders cautious, it pays to be proactive. Research local grants, government-backed schemes, or alternative finance such as crowdfunding. If you rely on seasonal income or plan to invest in staff or equipment, early planning can mean better terms and fewer surprises.

3. Improve efficiency with digital tools

Manual tasks cost time and money. Whether invoicing, stock control, payroll, or marketing, affordable digital tools can save hours each week. Automation not only reduces admin – it also improves accuracy, customer experience, and resilience. Don’t feel pressured to overhaul everything at once: even minor upgrades can make a big difference.

4. Prepare for supply chain disruption

If your business depends on importing stock or raw materials, recent tariffs and geopolitical tensions may already affect your costs and timelines. Review your supply chain for weak points. Are there alternative suppliers, local options, or ways to hold more buffer stock during uncertain periods? Flexibility now can help avoid costly delays later.

5. Stay connected to your customers

Economic uncertainty affects your customers, too. Keep in touch, whether through surveys, reviews, or informal conversations, to understand their changing needs. Are they more price-sensitive? Looking for flexible delivery options? Use this insight to adjust your products, services, or pricing – and retain loyalty, even when budgets are tight.

6. Use your network

You don’t need to face these challenges alone. Business support is available – from resources like local enterprise hubs and chambers of commerce, to advisory bodies like the Federation of Small Businesses. These organisations offer everything from funding advice to mentoring and peer networking.

Lay a solid foundation to navigate challenges confidently

Beyond networking and other practical strategies outlined above, building a strong foundation early on helps you confidently face wider economic pressures.

Our company formation services make setting up your business easy, so you can focus on what you do best. By forming a limited company, you can enjoy potential tax benefits and enhance your business’ credibility right from the start. With everything in order, you’ll be well-prepared to meet the challenges of 2025 and beyond.

If you have any questions or thoughts about this article, please comment below, and we’ll happily respond.