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How is Covid-19 affecting entrepreneurs and small firms in Northern Ireland?

Small firms make up more than 95% of businesses in Northern Ireland. Their smaller size and resource-base has made them particularly vulnerable to the damaging economic effects of the pandemic.

The pandemic has had a negative impact on businesses of all sizes. But small firms and new firms have been particularly affected, as they are over-represented in those sectors that have faced most restrictions. These firms have typically faced a longer lockdown, which has had knock-on effects on their income and cash flows.

Businesses have adapted through innovative behaviour and digital adoption – for example, introducing delivery or ‘click and collect’ – but there has been a detrimental impact on owners’ mental health. Although government support has provided cash injections, the assistance offered to new businesses has been a belated addition. It is also an addition that may hamper entrepreneurial activity in the longer term.

Why are small and new firms more vulnerable?

Small firms are believed to have been most affected by the pandemic as they tend to be over-represented in those sectors that have been most heavily restricted by lockdowns. This includes the sectors of hospitality, travel and personal services, which include restaurants, hotels and hairdressers (OECD, 2020b).

New and start-up businesses are regarded as particularly vulnerable due to the fact that they typically engage in more high-risk activities. They face more barriers in terms of accessing traditional forms of finance and are in the early stages of their relationships with customers and suppliers (OECD, 2020a).

Start-up firms in particular are also likely to have lower cash reserves on which to draw. This affects their ability to deal with any unforeseen additional costs such as the shift to remote working and/or infection prevention measures. With trading revenue down or paused, a shortage of cash also reduces their ability to cushion against lost income as a result of the pandemic.

What does the evidence tell us?

The Business Interruption Coronavirus Survey (BICS) confirms that the effects of Covid-19 have been much more severe for small businesses in Northern Ireland than larger firms (Huong, Hopley and Hewitt-Dundas, 2021). Higher proportions of small firms report very low cash reserves as well as low confidence in their immediate survival. The effects differ across sectors, but the pattern of firms most affected by lockdown restrictions being hit hardest also applies here.

Complementing the BICS analysis with a bespoke survey shows that coping strategies to deal with the pandemic have included reducing costs and introducing new processes or new digital technologies. In fact, digital transformation has been a particular feature for small businesses in Northern Ireland, with many adopting digital technologies they had never used before or increasing the use of those previously adopted.

Prior to the pandemic, small businesses in Northern Ireland lagged behind the rest of the UK on digital adoption. As a result of the pandemic-induced catch-up, they were thought to have coped better with Covid-19 than small businesses in the rest of the UK, although the continuing lack of digital skills is an increasing concern.

What about entrepreneurs and new firms?

Evidence for new and start-up businesses in Northern Ireland also corroborates the negative impacts on turnover and cash flows (Bonner and Pollard, 2021). Business activity for new firms was severely curtailed with innovation activities particularly affected. For example, more than two-fifths of firms postponed introducing new products or services and one-fifth held off bringing in new processes.

Despite this, there is evidence of adaptive behaviour with one in five identifying new opportunities arising from the pandemic and a similar share having introduced new products or services during the year.

Of concern for the wider economy is the reported negative effects on owners’ ability to grow their businesses and on productivity. Given Northern Ireland’s pre-existing poor productivity relative to the UK, the results for these new firms may indicate further exacerbation of the problem.

Future entrepreneurial activity may also be stifled as, aside from the business impacts, the mental wellbeing of owners and of employees were also particularly affected. Three-quarters of owners cited negative mental health concerns due to the impacts of Covid-19, and about four-fifths believe that conditions to start a business are now more difficult than pre-pandemic.

It is too early to assess the impact on the number of new business starts in the first quarter of 2021 because the data have not yet been released. The 2020 data for Northern Ireland showed a V-shaped recovery in the number of business births across the year (Bonner and Pollard, 2021).

This ran contrary to previous years, but was in line with the experience in other countries, resulting in a higher number of business start-ups in 2020 than 2019 (see Figure 1). The trend is thought to be due to a combination of first, new businesses set up to respond to existing or emerging needs as a result of the pandemic, and second, necessity entrepreneurship by those who had temporarily or permanently lost their jobs.

Despite the increase in business births, the number of self-employed, who are often categorised as entrepreneurs, fell in 2020. In Northern Ireland, the number dropped from 136,000 in the first quarter of 2020 to 112,000 by the fourth quarter, an 18% decline. This decrease was predominantly among self-employed men.

Figure 1: Number of business births in Northern Ireland, 2017-2020

Source: ONS Business Demography Experimental Statistics

What support has the government provided for small businesses?

Compared with start-ups, established small businesses were relatively well catered for in the government support packages. The main UK schemes, such as the Coronavirus Job Retention Scheme and the Bounce Back Loan Scheme loan facilities were complemented with Northern Ireland specific supports, such as the £10,000 Small Business Grant and the £25,000 Retail, Hospitality, Tourism and Leisure Grant. There were also additional smaller sector-specific schemes.

Entrepreneurs and new businesses were less well supported until later on in the pandemic. Entrepreneurs who had recently started businesses were initially ineligible to access the main UK scheme for the self-employed (the Self-employed Income Support Scheme). Eligibility was not granted until the fourth wave of the scheme, announced in March 2021, a year after the initial lockdown.

Northern Ireland has addressed some of the gaps in support for entrepreneurs and business owners, announcing specific schemes for business owners, albeit at the end of 2020. The Limited Company Directors Support Scheme and the Newly Self-Employed Support Scheme were announced in late November/early December.

The former was designed to provide a one-off grant of £3,500 to company directors who had personally been adversely affected by Covid-19. The latter provides a similar one-off grant of £3,500 to those who had become newly self-employed since April 2019.

Start-up and new business owners recognised the importance of the various business support schemes to help with company survival. But the majority disagreed that they had been tailored to help new businesses (Bonner and Pollard, 2021). The adequacy of the financial supports was also questioned.

Almost half of owners disagreed that the amount provided was adequate, while a similar share disagreed with the length of time taken to receive payment. The majority opined that the supports were unsatisfactory in terms of eligibility and only one in five believed that the supports were easy to access. Those accessing alternative forms of finance also stated that they found it more difficult than in previous years.

The findings are in line with the experience of other countries whereby support for start-ups and new businesses has largely been neglected. Entrepreneurs have generally not obtained government support. This is partly due to bureaucratic requirements being perceived to outweigh the benefits, but also due to misalignments of the support with start-up businesses and a lack of information and understanding of what is available by the owners.

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Authors: Karen Bonner and Steven Pollard
Image: OscarStock Adobe Stock
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