SMEs are a bedrock of the British economy – so why is it so hard to get northern enterprises funded?

A wave of job cuts primarily hitting young people has seen unemployment levels increase to a record 4.8% in the UK. Through the pandemic, the British government has tried to establish support for jobs by creating – and recently extending – a job-retention scheme. It has also provided support for small and medium enterprises (SMEs) by offering grants and loans and by postponing VAT payments to prevent companies from defaulting, delaying the inevitable surge of future unemployment.

SMEs are considered the bedrock of the UK economy. In 2019, SMEs comprised over 99% of all businesses. There are 5.9 million SMEs, and they employ over 15 million people, generating a turnover of around £2.2 trillion. Most businesses in the north of England are SMEs. Nevertheless, SME founders who operate in the northern region were facing huge financial challenges long before the pandemic occurred.

The evidence clearly shows that the centralised nature of the UK economy hinders future investment for high-growth firms in the north. Most private investors are heavily concentrated in the City of London and the south of England, specifically Oxford and Cambridge. Additionally, there is insufficient desire from high street banks to loan SMEs the investments that are needed for research and development as well as future growth, preferring to put their money into more secure, established businesses.

The City of London offers a template for the rapid growth of innovation-led enterprises. Most of the UK “unicorns”, privately owned startups that have amassed a worth of over US$1 billion (£760 million), such as Monzo, Ocado and Deliveroo, are located in London. This vibrant ecosystem is heavily supported by private and public sectors, as well as private investors and higher education institutions, in an environment rife with skilled and talented people.

This gap in funding contributes massively to the UK “productivity puzzle” where northern SMEs have substantially lower rates of productivity compared with southern SMEs. The “left behind” de-industrialised cities and towns in the north of England suffer from a systemic lack of investment in key infrastructure, or a skilled workforce that would build economic growth and a resilient entrepreneurial ecosystem.

The northern region has been part of a broader government focus on policy in recent years in reaction to criticisms of London-centrism. The Northern Powerhouse vision laid out by government seeks to reduce the historic north-south divide by bolstering economic prosperity through investment, alongside a general promise to “level-up” the north. However, the current pandemic has shed an important light on deep regional inequalities that face the UK, posing important questions about the serious need to deliver strategies and investment commitments.

To understand the nature of the local investment landscape in the Leeds city region, I collaborated with SME founders, business support managers and civil servants to understand what is missing in the funding landscape. They indicated that new local entrepreneurs face substantial entry barriers when navigating the local entrepreneurial ecosystem, which includes the funding and business support available in the region.

To provide clarity and transparency for new businesses trying to weather the storm of the pandemic, with the collaboration of different stakeholders, we mapped out the funding landscape in the Leeds city region. The map offers an entry point — by no means conclusive of the dynamic funding landscape — to help entrepreneurs navigate the unfamiliar terrain of funding and business support. It highlights various funding types, such as venture capital, public funding and support, and crowdfunding platforms, available for different business stages. You can see a PDF of the map here.

From this map and other accumulated evidence, it is clear that early-stage ventures face a systemic lack of funding, forcing them to be heavily reliant on friends and family as well as their personal finances when beginning their own businesses. This is challenging for many aspiring entrepreneurs and self-employed people who want to create new, innovative markets or who simply want to make a living in this difficult economic environment.

The coronavirus pandemic offered a sharp test for the one-size-fits-all strategy for providing regional support. A tailored and more comprehensive local approach that creates an investment architecture to support this growing economy is necessary to support the diverse nature of businesses in the north.

Finally, the pledge to level the left-behind cities, especially after the coronavirus pandemic and Brexit, is vital to ensure the creation of new jobs and to accelerate the economic recovery in the region. This can be made by applying the foundations of the local industrial strategy to the creation of tactical interventions that can support SMEs and microbusinesses, and create a level playing field in the UK economy.