This blog was written by Dr Raffaella Calabrese of the University of Edinburgh, as part of a Fellowship with the Scottish Parliament Information Centre. The analysis and conclusions are made by the author. As with all guest blogs, what follows are the views of the author, not those of SPICe or the Scottish Parliament.
The COVID-19 pandemic has caused an unprecedented shock to the global economy. Small and medium-sized enterprises (SMEs) in Scotland have been adversely affected by financial instability and many have faced liquidity problems. This means that some businesses have not had enough liquid assets – such as cash – to meet their short-term obligations, such as paying employees, repaying loans, and paying operational costs. This blog summarises the main effects that the pandemic has had on Scottish SMEs, in terms of liquidity and access to finance. Generally, a SME is defined as a small or medium-sized enterprise with fewer than 250 employees, including zero employees.
In 2020, there were 361,875 registered and unregistered businesses in Scotland with less than 250 employees. This represents 99.3% of all private sector businesses in Scotland, meaning SMEs are a central plank of the Scottish economy. The two largest sectors are Professional, scientific and technical activities (13.3% of all Scottish SMEs) and Construction (13.2%).
While SMEs represent the majority of the private sector business base, they only account for 56% of total private sector employment in Scotland. The two sectors with the largest number of employees are Retail (20.7% of the total number of employees in Scottish SMEs) and Accommodation and food service activities (17.6%). So, given the central role of SMEs in the Scottish economy, understanding the financial impact of COVID-19 on these businesses is central to developing recovery policy responses. SMEs drive employment, innovation, regional development and poverty reduction, and, ultimately, the growth of the Scottish economy.
COVID-19 impact on SMEs in liquidation
From merging the list of Scottish companies in liquidation in 2020 provided by Account in Bankruptcy (Scotland’s Insolvency Service) with the database FAME provided by Bureau van Dijk’s Fame, we can give an overview of some early trends on the impact of COVID-19 on Scottish SME liquidity. Our matching and analysis of these datasets revealed 171,107 solvent and 1,300 insolvent companies registered in Companies House. Readers should note our analysis does not consider unregistered companies, these are mainly those set up by sole traders and make up about half the Scottish business base.
Emerging findings from these initial datasets show that despite the severe effects of the pandemic on the Scottish economy, the number of businesses that went into liquidation in 2020 was 20% lower (1,304) than the number (1,652) that were liquidated in 2019. We believe this difference can largely be explained by both Scottish and UK Government lifeline support schemes that were provided to Scottish businesses in 2020, such as the COVID-19 Business Loan Support Scheme, and business-rates related reliefs and grants.
The emerging data illustrated on the map below shows the percentage of SMEs that went into liquidation by the total number of registered companies located in each Scottish Parliament Constituency area. The map functionality allows users to zoom in and out on Scottish Parliament constituencies at different scales and hovering over a constituency reveals the ratio of liquidations to active businesses and the total number of liquidations.
This map shows most of the liquidated businesses are generally concentrated in urban areas, such as Aberdeen, Dundee, and the central belt between Glasgow and Edinburgh. In particular, ‘Dundee City West’ and ‘Renfrewshire North and West’ have relatively higher liquidation ratios.