SMEs In The Squeeze: Why Malaysia’s Small Businesses Are Feeling The Heat

If running a small business in Malaysia feels like trying to walk a tightrope while juggling flaming torches lately, you are not imagining things. Rising costs, shaky demand and tighter financial conditions are all piling up at once, and SMEs are the ones doing most of the balancing act.

According to the New Straits Times, smaller firms are increasingly being squeezed from every direction, with the ongoing Middle East crisis adding even more weight to an already loaded plate. Disrupted supply chains and climbing fuel prices are creating a perfect storm that smaller businesses simply did not sign up for.

The Cash Flow Tightrope

Chartered Tax Institute of Malaysia council member Harvindar Singh did not sugarcoat it. SMEs make up nearly 90% of businesses in Malaysia, and most of them are running on a month-to-month cash flow basis. In other words, there is not a lot of cushion when fuel, logistics and energy bills all decide to climb at the same time.

So what could actually help? Harvindar suggests a few targeted moves that could give SMEs some breathing room.

A Tax Breather

One option on the table is a temporary tax exemption for the first RM150,000 of taxable profit. Right now, SMEs are taxed at tiered rates starting at 15% for that first RM150,000, then climbing to 17% and eventually 24%. Lowering that bottom rung, even temporarily, could offer real relief for businesses operating on thin margins.

Other ideas include short-term reduced tax rates, more flexible payment arrangements, allowing businesses to carry losses back to previous profitable years for tax refunds, and expanding access to group tax relief for smaller entities within larger corporate structures. Basically, give SMEs a few more financial tools to work with.

The Bigger Picture

Of course, SMEs are not the only ones feeling the heat. CIMB Securities economists Chew Khai Yen and Michelle Chia point to a broader shift, where higher energy and commodity prices, supply chain disruptions, weaker external demand and tighter financial conditions are reshaping Malaysia’s economic outlook.

The good news? Malaysia’s economy is holding up better than you might expect. Thanks to a diversified structure and lower sensitivity to oil price shocks compared to previous cycles, the country has more shock absorbers than it used to. Domestic demand is also doing some heavy lifting.

The first quarter GDP growth came in at 5.3% year-on-year, which is a step down from the 6.3% recorded in the fourth quarter of 2025, but still respectable. Inflation, meanwhile, ticked up to 1.7% in March, mostly thanks to fuel costs.

CIMB Securities has trimmed its full-year GDP forecast to 4.3% while bumping inflation expectations to 2.6%. Translation: slower growth, slightly higher costs.

The Fiscal Balancing Act

Here is the tricky part. While everyone agrees SMEs need help, Putrajaya is walking its own tightrope. Subsidy costs are climbing thanks to elevated fuel prices and widening refining margins, which means the government cannot just open the spending floodgates.

So what is the realistic path forward? As Harvindar put it, any SME-focused tax relief would need to be targeted, temporary and carefully calibrated. CIMB Securities expects subsidy expenditure to peak in the second quarter of 2026 before easing, which means whatever support comes will likely be measured, just enough to keep businesses afloat without throwing public finances off balance.

The silver lining? If geopolitical tensions cool down faster than expected, energy prices could ease, giving both businesses and the broader economy some much-needed room to breathe.

For now, though, Malaysian SMEs are doing what they do best: adapting and hustling while hoping the next quarter brings a little less drama.