Supporting inclusive entrepreneurship and innovation among and through micro, small and medium sized enterprises (M-SMEs)

Challenges facing small firms 

Small and Medium-sized Enterprises (SMEs)1 are the lifeblood of the UK economy, comprising 99.8% of firms and generating 60% of employment2 at the start of 2024.  

While socio-political and economic challenges arise for all businesses, SMEs face some persistent issues due to their ‘liability of smallness’, which includes things like limited financial reserves, meaning late payment from clients or market disruptions can cause destabilising cash-flow issues. They have weaker bargaining positions with suppliers and face higher unit costs and greater difficulty attracting and retaining staff and, indeed, finance.3 Other key challenges include keeping informed about, and effectively implementing, new regulations. Know-how, cost and operational challenges sometimes prevent or delay compliance for some firms.4      

However, there is diversity within the small and the medium businesses under the acronym ‘SME’ in the challenges they face. Micro enterprises with less than 10 employees will face heightened challenges when compared to a medium-sized enterprise with close to 250 employees and a potential turnover of up to £44 million.

The age of the enterprise also has an influence. A new, small business also faces the ‘liability of newness’ with no credit history or reputation to help establish credibility and legitimacy, accessing credit terms with suppliers is often impossible and accessing finance presents even greater challenges.   

Consider then the challenges faced by small-scale, innovative STEM start-ups and spin-outs when trying to access finance. The typical challenges faced by small, new firms are compounded by the specific characteristics of these ventures. Innovative STEM start-ups and spinouts typically have science or tech that is difficult for outsiders to understand, combined with their typically lengthy, cash-intensive development trajectories, resulting in them being considered too high-risk to attract private investment early in their development cycle.5   

Regardless of business size, age and financial reserves, some business owners will typically experience greater difficulty than others when seeking finance, due to their personal characteristics or backgrounds, such as female STEM founders.6 This has led to initiatives, such as the Charter for Inclusive Entrepreneurship, aiming to develop more inclusive ecosystems that can support greater equity in outcomes among founders.  

SME challenges in developing and implementing EDI strategies 

Despite SME’s employing 60 percent of the UK working population, functions such as HR are more likely to be undertaken informally within SMEs; many smaller firms will not have formal policy documents or documented procedures. The absence of HR specialists has consequences in terms of smaller firms’ comparative ability to implement effective recruitment practices and, given significant relative cost implications, SMEs are less likely to provide off-the-job training to staff.7  

This holds implications for EDI within SMEs without a HR specialist in-house, as staff may not be familiar with all relevant HR legislation or good practice, and they may not have access to training around unconscious bias, or inclusive recruitment and management practices. It is usually the HR specialist who has such expertise and assumes ownership of EDI policy and strategy development and implementation within larger firms.7 

While many small business owners might subscribe to the principles of equity and inclusion, in these resource-constrained contexts a lack of expertise and knowing where to start and what to do likely confounds formal EDI adoption.  

The lack of codification, measurement and reporting means that EDI practices within SMEs remain somewhat of a black box. But this does not mean it is absent. Small firms and their cultures are shaped by their owners’ values and practices, and good EDI practices and outcomes undoubtedly can be found within UK SMEs – the challenge is identifying, celebrating and sharing these good practices so that others can see from peer role-models how they might take that, all-important, first step.

References

1) The UK Government define an SME as a firm with fewer than 250 employees, less than or equal to £44m in annual turnover or a balance sheet total of less than or equal to £38m.   (See: https://www.gov.uk/government/publications/procurement-act-2023-short-guides/supplementary-information-small-and-medium-sized-enterprises-definition-html#fn:1)