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Surge in small business closures despite improving economy as more than HALF fail to survive beyond five years

By Daniel Edward For Thisismoney.co.uk and Amy Andrew for Thisismoney.co.uk Follow @@amyandrew2

Published: 03:50 EST, 15 November 2014 | Updated: 03:50 EST, 15 November 2014

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More than half of new small businesses in the UK are failing to survive longer than five years, according to shocking new figures.

Research commissioned by insurance group RSA revealed that just 45 per cent of start-ups that launched in 2006 made it to their fifth birthday.

Small firms that set up during the recession are even less likely to make it - 25 per cent of start-ups that set up in 2008 didn't make it to their second birthday, according to the research. Whereas in 2006, a slightly higher 80 per cent managed to make it past the two year mark.

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In 2009, 90 per cent made it 12 months without folding, but in 2010 only 86 per cent were still operating after a year, according to the study, which has followed SME closures since 2006.

Last year, the economy grew 1.9 per cent - its fastest rate since the recession. In response, large and medium-sized companies have started to grow, and hire, once again.

In contrast, the birth rate for micro businesses has begun to flatten for the first time since the financial crisis.

However, supporting small businesses may prove to be a challenge to policy makers who want to see wider economic growth, according to the study - something which can be achieved most efficiently by companies employing between 250 and 499 employees.

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In response, small firms are calling for greater support to help them grow. The RSA research puts bank lending at the top of the small business wish list.

Reducing tax on employment is also a key goal for small businesses, who could perhaps then be tempted into employing additional members of staff.

Some experts believe the apparently weak prospects for British SMEs disguise a more positive message about the improving state of the economy.

They say as more jobs become available, some of those that turned to entrepreneurialism after being made redundant during the economic downturn are returning to employment.

Osman Ismail, senior economist at CEBR, on the RSA research pointed out: 'There could be some fraction of people leaving self-employment and returning to employee jobs.'

But he added: 'However, this is not a driver of the squeeze upon the number of small firms in the VAT register.

'This squeeze began from 2008, and on the latest data (for 2013), their number remains below what it was in 2008. It is a long-term trend, with poor economic conditions leading to elevated business death rates and subdued birth rates.'

However, data showing that small businesses have a 50 per cent risk of failing within five years may not accurately represent the potential of their position in the market.

The 'Back in the Game' report - produced by ACCA and IMA - explains: 'While SMEs were hit hardest by the economic downturn, they have historically shown greater resilience, compared to their large corporate counterparts.

'SMEs are seizing new opportunities for economic growth, by embracing innovation, entering new markets and building strong supplier relationships.'