Small business expansion held back by rising costs

Ambition to grow has exceeded pre-pandemic levels among small businesses but they are being held back by rising costs, skills shortages and a lack of access to finance, a survey has found.

About 54 per cent of small businesses expect to grow over the next year, up by four percentage points from 2019, according to the Small Business Index survey of about 1,200 small businesses in the UK at the end of last year.

Operating costs, however, had hit a seven-year high, according to 78 per cent of respondents. The poll, which was conducted by the Federation of Small Businesses (FSB), found that about 40 per cent reported that gross profits had fallen over the final three months of the year after inflation eroded margins. The number of firms who had employed new workers in the last quarter of 2021 was at 16 per cent, its highest level since the second quarter of 2015. A similar proportion, 17 per cent, expect to recruit more staff in the first three months of this year.

The proportion of small businesses that applied for finance and the proportion that had their applications approved were also at their lowest for seven years: 11 per cent of respondents said that access to finance was a barrier to their growth this year.

The index for business confidence fell to a 12-month low of minus 8.5 in the final quarter of last year, the poll found.

Optimism among small businesses is being hampered by inflation, labour market shortages and tax rises in April, according to Mike Cherry, national chairman of the FSB. “We urgently need the government to start looking closely at the policies that will empower the small business community to spur our recovery from this recession as it did the last,” he said. “The growth intentions are there but we need the right support to turn vision into reality.”

The bounce-back loan initiative had been a “real success” but was not sufficient to support small businesses to recover from the pandemic, he said, adding that businesses were concerned that lenders would take the same approach as they did after the financial crisis of 2008.

“After the financial crash we saw banks pull up the drawbridge for small businesses,” Cherry said. “With emergency loan initiatives and the new enterprise allowance at an end, it’s vital that this trend doesn’t take hold once again.”