The ongoing conflict in the Middle East continues to have a knock-on effect on small businesses in the UK.
So much so that a survey by Bibby Financial Services (BFS) reveals that an alarming number of SMEs now fear bankruptcy if the war continues.
With costs continuing to rise and supply chains facing renewed disruption, many businesses are being forced to reassess their pricing in an effort to protect profit margins.
And as uncertainty persists, many businesses are finding themselves caught between absorbing additional costs and passing them on to increasingly price-sensitive customers.
How the Iran conflict is affecting UK businesses
Recent data suggests that many SMEs are struggling to absorb the consequences of the conflict, with concerns growing over profitability, cash flow, and long-term viability.
A report by SME funder Bibby Financial Services (BFS) – which surveyed over 500 UK importers and exporters – revealed that 74% of SMEs reported facing direct disruption from the Iran war.
As a result, businesses have reported an average loss of £38,207 since the start of the crisis, with 70% of SMEs now fearing bankruptcy. More than half (55%) also consider themselves to be in a more uncertain position now compared to when Russia invaded Ukraine in 2022.
These concerning figures come after 36.9% of firms reported to be in “critical financial distress” in the first quarter of 2026. Hospitality businesses, such as pubs and bars, also reported being hit by high supplier surcharges and fuel costs due to the war.
Michael McGowan, Managing Director at BFS, comments: “This is a new era of international trade in which businesses are no longer reacting to isolated shocks; they are operating within a continually volatile landscape shaped by geographical instability.
“UK importers and exporters were already operating under intense pressure from inflation, higher interest rates, and the long-term effects of Brexit, and the Iran war has amplified every one of those challenges.”
Rising costs are forcing SMEs to rethink growth plans
The combination of rising costs, weaker investment and slowing recruitment is weighing heavily on the outlook for UK businesses.
BFS’s study also found that 39% of businesses are absorbing costs while passing others onto customers, while 29% are absorbing the full increase themselves.
Growth has also slowed for many businesses, as fallout from the war is forcing businesses to halt their investment plans. This slowdown is also affecting hiring activity, with the number of vacancies in the UK falling to 705,000 between February and April 2026 – the lowest level recorded for the same period in 2021.
“Businesses are facing a stark choice: absorb rising costs and see margins collapse or pass them on and risk losing customers”, McGowan adds. “With nearly a third absorbing the full impact, it’s clear many are taking the hit – but this isn’t sustainable, even in the short-term.”
Unsurprisingly, this has had a knock-on effect on business confidence as well. The Business Confidence Monitor (BCM) by ICAEW recorded a sharp deterioration in sentiment in Q1 2026, with the index falling from +2.8 before the conflict to -1.1.
How small businesses can protect themselves from future shocks
While small businesses can’t control geopolitical events, there are ways to build resilience against future shocks.
For example, reviewing supply chains, diversifying suppliers and building better flexibility into procurement strategies can help reduce exposure to disruptions caused by international conflicts. Businesses should also regularly review their cash flow position and maintain contingency plans to manage any sudden increases in operating costs.
Clear communication with customers, such as around price increases, will also be critical in maintaining trust and loyalty. Even a straightforward email explaining the price increase can go a long way and reduce the risk of losing business to competitors.
McGowan also advises that managing foreign exchange (FX) exposure should be a priority for businesses looking to protect margins and minimise the impact of market volatility.
“We’re seeing businesses adapt, reviewing supply chains, managing their FX exposure more closely and strengthening working capital,” he concludes.
“In a trading environment characterised by persistent geopolitical disruption and market uncertainty, effective FX management is no longer optional – it’s a critical tool for protecting cash flow and profitability.”
