Circular economy challenges for SMEs: practical ways to overcome the barriers

Can small businesses go circular? Yes. The main challenges in transitioning to a circular economy are upfront costs, skills gaps, supply-chain coordination and complex regulation. SMEs can overcome them by starting with low-cost resource efficiency, then adding repair, reuse and take-back in stages, supported by specialist partners who fill gaps in data, logistics and compliance.

Most small businesses already agree that wasting resources makes little sense. The harder question is how to act on it when cash is tight, teams are stretched, and the rules keep changing.

It matters because small businesses are most of the economy. SMEs make up 99.9% of UK businesses and account for around 60% of private sector employment and 51% of turnover, according to the House of Commons Library. Across the EU, nearly 26 million SMEs employ around 90 million people (European Commission). Circularity cannot happen at scale without them.

This piece is for owners and managers who want practical answers to circularity. It explores the real barriers SMEs face when moving to a circular economy, what evidence from the UK and Europe says, and what routes can work in practice. It also explains where a specialist partner can take some of the weight.

What the circular economy means for small businesses

A circular economy keeps products, components and materials in use at their highest value for as long as possible. That is the opposite of the linear “take, make, dispose” model, where anything left over is treated as waste.

For a small business, circularity shouldn’t be treated in isolation. It should be a set of practical choices:

1. • Designing goods so they can be repaired, upgraded or refurbished.
   • Using recycled or recovered materials where quality allows.
   • Offering access or performance, through leasing or subscription, rather than one-off sales.
   • Setting up take-back schemes so items and packaging come back for reuse or recycling.
   • Using data to understand where resources go.

However, recycling still plays a major part. In a circular business model, though, it usually comes after higher-value steps such as reduction, repair and reuse. Our guide to the principles of the circular economy explains this hierarchy in more detail.

It also means seeing your business as part of a wider ecosystem, not a standalone operation.

There is still a long way to go. The latest Circularity Gap Report puts the global economy at just 6.9% circular, meaning 93.1% of materials entering it come from virgin sources. The 2026 edition estimates that around €25.4 trillion of value is lost every year to linear production and consumption, roughly €1 in every €3 created globally (IISD SDG Knowledge Hub).

There is a clear commercial case here. Circular strategies can lower material and disposal costs, open new revenue from repair or resale, and reduce exposure to volatile global prices and supply disruption.

Why SMEs face different challenges than large businesses

Small and medium-sized enterprises (SMEs) start from a different place than larger organisations. Many barriers that look technical are really about cash flow, capacity and risk.

On the constraint side, SMEs usually have:

• Limited capital for new equipment, redesign or digital tools.
• Tight margins and short planning horizons.
• Lean teams, with no dedicated sustainability or data specialist.
• Less bargaining power with large suppliers.
• Little time to interpret complex environmental rules.

But small businesses also have real advantages. Decisions are quicker. Leaders are close to the work. Relationships with local customers are direct, which suits repair and take-back. Many SMEs sit within a strong local ecosystem of recyclers, repairers and logistics partners.

The main challenges in transitioning to a circular economy

The biggest barriers fall into four groups: finance, skills and data, supply chains, and regulation. None are unique to small firms, but their combined weight is heavier when resources are stretched.

The research backs this up. In the British Business Bank‘s 2025 study of 1,783 SMEs, 83% saw at least one barrier to progress on net zero, with high costs and lack of finance or grants the most common.

Finance, investment and uncertain returns

Finance is the barrier SMEs mention most. Circularity often costs money today for savings that arrive later. In the Federation of Small Businesses’ 2025 net zero research, 38% of small firms cited a lack of capital as a barrier, a third said green investments take too long to pay back, and only 13% said they had the required finances to make the change (edie).

Redesigning a product range, switching packaging or buying sorting equipment all need upfront spend. Circular business models such as leasing and buy-back can improve lifetime value but slow short-term cash flow. And returns, such as lower disposal costs or brand value, can be hard to monetise.

Skills, data and operational capacity

Circular strategies combine design, operations, data and new customer offers. Few small teams have all of these in-house.

The same FSB research found that only 18% of small firms feel they have the right skills and 26% the right knowledge to act. Just 14% said they have enough time (Channel Web).

Existing ranges were rarely designed for repair or disassembly. Running refurbishment needs new processes and quality checks. Tracking material flows and returns needs data that many firms still hold in spreadsheets, if at all. Above all, managers have limited time, and circular projects compete with urgent daily work.

Supply chains, reverse logistics and customer demand

No business goes circular alone. It depends on an ecosystem of suppliers, customers, logistics providers and recyclers.

Smaller buyers struggle to influence the materials and packaging their suppliers use. Reliable recycled inputs can be hard to source at low volumes. Reverse logistics, the collection, transport and sorting of returned goods, is often unprofitable at smaller scales unless it is shared. Customers may need persuading that a refurbished product or a refill system is worth trying.

Regulation and compliance

Environmental rules are changing fast in the UK and across Europe. In the European Commission‘s 2024 Eurobarometer, 35% of EU SMEs named complex administrative or legal procedures as a challenge, and 28% named high costs. Knowing which apply, what data to collect and how to report it takes time many SMEs do not have. Firms that trade into Europe face different rules in each country, which adds cost and complexity.

How SMEs can address upfront costs and skills gaps

The most effective way to handle cost and skills barriers is to start small, prove the savings, then reinvest them. You do not need a large transformation budget or an in-house expert to begin.

Start with quick-payback actions

Begin with changes that pay for themselves quickly. Better segregation, simpler packaging and tighter stock control often cut costs within months. Separating cardboard, for example, can cut general waste charges and create a cleaner recycling stream. Our on-demand waste services for SMEs are built for exactly this kind of first step.

Pilot before you scale

Test circular strategies on one product line, one site or one customer group. A small pilot generates the evidence you need to justify a bigger investment, and limits risk if it doesn’t work.

Use the equipment and expertise of others

Rather than buying specialist kit, you can hire it, share it or borrow it from your local ecosystem of partners. Balers and compactors, for instance, can turn bulky waste into material with resale value without a large capital outlay.

Build skills in layers

Close skills gaps gradually. Give key people in purchasing, operations and product development basic circular economy training. Use sector bodies and peer networks for guidance and case studies. Then bring in outside expertise only where it adds clear value, such as eco-design, compliance or data. Sustainability consulting can help you prioritise without hiring a full-time specialist.

Look for external funding

Grants, green loans and local support programmes can cover part of the upfront cost. Yet very few SMEs use them: the British Business Bank found only 7% had accessed grants and 2% loans for their net zero journey, even though 41% said grants or funding would help most. Growth hubs and local development agencies are a good first stop for finding what is available in your area.

How SMEs can manage regulations and competing priorities

The simplest way to manage regulation alongside day-to-day pressures is to treat compliance as the foundation of your circular plan, not a separate task. Many of the actions that keep you compliant also cut waste and cost.

Know which UK rules apply to you

In the UK, the main areas for most SMEs are:

• Waste duty of care, covering how you store, transfer and dispose of waste.
• Simpler Recycling in England, which requires workplaces to separate key recyclable materials. Our guide to Simpler Recycling rules and timelines explains what applies and when.
• Producer responsibility for packaging, electrical equipment and batteries. See our overview of extended producer responsibility.
• Digital waste tracking, which is being introduced to record waste movements electronically. Read more about digital waste tracking.

Plan if you trade into Europe

Businesses selling into Europe face a growing set of rules, as part of a global shift towards producer responsibility. The EU Packaging and Packaging Waste Regulation (PPWR) is harmonising packaging requirements across member states. Producer responsibility for textiles is expanding across Europe, and EU Digital Product Passports will require product data to be shared along the value chain. Each country in Europe still sets its own registration and reporting details, so it pays to plan early.

Put compliance and circularity on the same list

Competing priorities are easier to manage when one set of actions serves several goals. Accurate waste and packaging data supports compliance, cost control and ESG reporting at once. Appoint one owner, review progress quarterly, and let a partner handle the detail where the rules are complex.

See our explainers

Repair and circular product design

Repair and circular product design are among the most valuable strategies a small business can adopt. They keep products in use for longer, cut material costs and create new revenue. They also sit higher in the waste hierarchy than recycling, so they keep more value in your business.

Why repair and circular product design matter for SMEs

Most of a product’s environmental impact is locked in at the design stage. Once an item is made, the choices about materials, fixings and lifespan are hard to change. That is why the Ellen MacArthur Foundation puts design at the heart of the circular economy. The Foundation’s view is simple: if waste is designed out from the start, it never has to be managed later.

For SMEs, repair and circular product design also answer a commercial question. A product that lasts longer and can be fixed builds customer loyalty and brings people back for parts, servicing and upgrades.

Design for durability, repair and disassembly

Circular product design starts before anything is made. Practical design strategies include:

• Using modular parts and standard fixings, so components can be swapped rather than the whole item replaced.
• Choosing fewer, compatible materials, so products are easier to separate and recycle at end of life.
• Avoiding glues and permanent joins where screws or clips will do.
• Designing for durability, so products survive longer in everyday use.

Our article on circular design principles covers the main approaches in more detail.

Turn repair into a circular business model

Repair does not have to be a cost. Offered well, it becomes a circular business model in its own right. If you sell durable goods, you can:

• Offer repair in-house or through a local repair partner.
• Sell spare parts and simple repair guides.
• Take items back to refurbish and resell, often at a healthy margin.
• Bundle servicing into a subscription or product-as-a-service circular business model, so you keep ownership and recover the product at the end of use.

B2B customers in particular value reliable refurbished equipment with a clear guarantee.

Repair rules are tightening in the UK and Europe

Regulation is pushing in the same direction. In the UK, ecodesign rules already require spare parts to be available for some household appliances. In Europe, the EU’s Right to Repair Directive and the Ecodesign for Sustainable Products Regulation are raising expectations on repairability and product information. Businesses that build repair and circular product design into their strategies now will be better placed as these rules extend.

An example in practice

Consider a small furniture maker. It switches to modular designs and standard fixings, turns offcuts into smaller items, and offers a repair service. Older pieces come back for refurbishment and resale. The result is less waste, a new income stream and a stronger brand. The limit is logistics: take-back beyond a local radius only works with a wider partner ecosystem.

Handling returned products well is a skill in itself. Specialist brands such as ReBound, part of Reconomy’s Re-use loop, help businesses turn returns into resale and repair opportunities rather than waste.

1. Map your resources and waste. Use invoices, waste reports and staff knowledge to see what you buy, where it ends up and which processes create the most waste. Few firms do this yet: only 15% of small businesses have measured their carbon footprint (Channel Web).
2. Take the quick wins. Improve segregation, reduce packaging and tighten stock control to cut costs and build confidence.
3. Extend product life. Add repair, spare parts or refurbishment where your products allow it.
4. Build reuse and recovery routes. Introduce returnable packaging or take-back schemes, and send what cannot be reused to trusted recyclers in your ecosystem.
5. Pilot circular business models. Test leasing, subscription or deposit schemes with one customer group before scaling.

Share the load with your local ecosystem

Collaboration makes circularity viable at a scale no single SME could manage. Picture a group of local cafés sharing a glassware reuse scheme and a single food waste collection for anaerobic digestion, with one repair business maintaining their equipment. Industrial estates and high streets can work as a small circular ecosystem in the same way. For more ideas, see our circular economy examples and our guide to the circular economy supply chain.