Content of this unit
Barriers and challenges enterprises might face when developing a circular business model
Small and medium-sized enterprises are increasingly aware of the benefits of closing loops and improving resource efficiency, such as: saving material costs, creating competitive advantages, and accessing new markets. At the same time, however, various barriers pose challenges to small businesses in their transition to a circular economy, namely a lack of financial resources, difficulties in valuing future benefits against current costs, knowledge needs and lack of technical skills.

Based on various research studies barriers and challenges can be categorised as below:

1) Company environmental culture refer to the philosophy, habits, and attitudes of the company (manager and employees) towards implementing circular economy business practices

2) Lack of capital - Shifting from a linear to a circular production/business model requires activities such as distribution planning, inventory management, production planning, and management of a reverse logistics network [22], requiring a substantial amount of time and investment on the part of the company [26]. The level of upfront costs, the indirect (time and human resources) costs and the anticipated payback period are particularly important for SMEs

3) Lack of government support/effective legislation (through the provision of funding opportunities, training, effective taxation policy, laws and regulations, etc.)

 4) Lack of information about the benefits of the circular economy and environmental legislation

5) Lack of technical and technological know-how can hinder SMEs from transforming their linear business model into a circular one. Linear technologies are widely established in the current business practices, keeping the economy locked into its current form. Transforming business-as-usual operations would require new sustainable production and consumption technologies (in the fields of eco-design, clean production, and life cycle assessment) to be integrated into current linear business models, and competent professionals to be able to manage them.

6) Lack of support from the supply and demand network refers mainly to the dependency of SMEs on their suppliers’ and customers’ engagement in sustainable activities. The successful implementation of a circular economy necessitates the collaboration of all parties across the supply chain. Adopting a circular business model is likely to increase complexity throughout the supply chain (with regard to logistical, financial, and legal aspects), impacting the value chain of a product, process or service. In this context, issues related to governance (ownership, share of costs, and benefits along the value chain) need to be settled so that effective circular business models can be employed. Managing the transition in circular supply chains can be time-consuming, expensive, and may require collaboration with new market players. Especially for micro-small companies, one of the major barriers is the lock-in of distribution channels, as well as the unpredictable return flow of materials (hampering the efficient retrieval of products) in circular practices involving the remanufacturing and reuse of products. For example, in the case of remanufacturing photocopiers, the main challenge is to have the required labour to deal with the rate of photocopier returns

7) Negative customer behaviour: research demonstrates that despite benefits of innovative offers, users’ adoption time is much longer than expected. Insufficient customer awareness of the benefits of green products does not encourage a change in consumption patterns, and often there is no substantial pressure from the demand side on smaller organisations to meet sustainability criteria or develop a circular economy business model. The transition to a circular economy necessitates a shift in consumers’ lifestyle and behaviour.

In addition to the above the cost  of  ‘green’  innovation  and  business  models  has  been  considered as one of the major barriers to the adoption of sustainability practices by SMEs.
The upfront  costs  of  any  type  of  investment  and  the  anticipated  pay-back  period  are particularly important for  SMEs,  which are generally more sensitive to  additional financial costs  resulting  from  green  business  activities  compared  to  large  enterprises .
Aside from the direct financial costs, there are also indirect ‘hidden’ costs such as the time and human resources that businesses need to devote to make environmental improvements.  In many cases, these indirect costs constitute a critical obstacle to the implementation of ‘green’ innovation due to SMEs’ shortage of time and human capital
Financially, changing to a circular model often causes higher up-fro.t investment costs and longer time horizons of revenue generation (spread income instead of one, early transaction). Both can cause large or insurmountable problems to the cash flow of a company. Companies need larger capital reserves to ‘wait for their money’ (causing costs of interest rate).

Below you can find the main cost elements businesses may face when adopting circular business models:

Direct costs:
· Investment costs
· Technological innovation related costs
·  Digital technologies related costs (e.g. sharing platforms model)
·  Recycled materials (often more expensive than virgin)

Indirect costs:
· Time
·  Up-skilling of human resources
·  Costs of collaboration between partners (e.g. sharing platforms, circular supplies models)
·  Environmental costs
·  Higher cost for management and planning
·  Marketing related costs (“educating” consumers)