The FSB Small Business Index report is a temperature check of small firms’ sentiment and experiences at the end of last year. It incorporates investment and growth aspirations, late payment, and finance use. The report reveals that small businesses have lost some optimism amid difficult trading conditions.

The report covers the same period which tipped the UK economy into a formal recession according to ONS figures. It shows the scale of the turnaround in small firms’ hopes for the future that will be needed if they are to provide the growth required to kickstart the economy.

Investment and growth aspirations downbeat

The percentage of small businesses expecting to increase their capital investment essentially stayed flat between Q3 (25.1%) and Q4 (25.6%). This indicates that small firms are still being cautious about committing funds for investment while interest rates are still high. These are not expected to begin to fall until later this year.

Overall growth aspirations for the coming year for small firms worsened slightly between Q3 and Q4. Firms anticipating growth drop from 49.6% to 48.2%. Firms bracing for contraction rise from 12.7% to 15.0%.

However, the differences between sectors on this topic were especially pronounced. Information and communication firms were notably optimistic. A healthy 56.0% predict they would grow over the next 12 months, and only 9.4% expect they would downsize or consolidate the business, sell or hand it on, or close down entirely.

Hospitality sector downbeat

Manufacturing firms were similarly confident about future growth. 54.8% forecast growth ahead, and 7.9% expect to shrink. Among professional, scientific and technical firms, 52.5% are looking to grow with 9.8% predicting they would contract.

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Retail and wholesale firms were less optimistic than the average but were still within touching distance of the all-sector scores. 47.3% predict growth, and 18.6% predict contraction.

The hospitality sector was far more downbeat about its future prospects. Just three in ten accommodation and food service sector businesses (31.6%) believe they are on course to expand. A greater proportion – 35.5% – predict that they will contract. Among that latter figure, a shocking one in eight firms in the hospitality sector – 12.6% – expect to close entirely in the next 12 months. This is nearly four times the rate for all businesses (3.4%).

Late payments and finance perceptions worsen

Small firms experiencing late payments rose from three in five in Q3 (60.8%) to 65.8% in Q4. The proportion of small firms whose late payments worsened over the quarter, meanwhile, rose from 27.9% 34.9% in Q4.

Small firms’ views of the availability and affordability of new credit remained notably negative. Only around one in seven small businesses (14.5%) rating it as quite good or very good. Over half (52.0%) rated it as quite poor or very poor.

Among those small firms whose applications for new credit were successful over the quarter, a third (33.4%) were offered a rate higher than 11%, a new record for the SBI.

Martin McTague, FSB’s National Chairsaid: “When we look at how small businesses fared towards the end of 2023, it’s hardly surprising that the overall economy also stuttered, with Q4’s poor performance officially dragging the UK into a recession. Now the question is how we rekindle growth. And looking at how to kickstart investment and expansion will be a big part of the answer.

Personal guarantees: super-complaint to FCA

“One major barrier to investment among small firms is the imposition of personal guarantees for even relatively small amounts. This is why we raised a super-complaint with the Financial Conduct Authority about the practice. We think lenders should take a more holistic view of borrowers. They should recognise that demanding personal guarantees is having an overall chilling effect on growth and investment.

“We were relieved to see Government funding for the Recovery Loan Scheme, now renamed the Growth Guarantee Scheme, extended in the recent Budget. This will support the expansion plans of thousands of small firms.

“Another threat to small firms’ financing options looms. The planned removal by the Bank of England’s Prudential Regulation Authority of the SME Supporting Factor allows lenders to hold lower levels of capital to counterbalance loans to SMEs. If it is abolished, banks will have one more reason not to lend to smaller firms. We believe this will reduce the availability of finance overall, and push up rates.

“Unless matters change, the holding pattern seen in the SBI results looks set to carry on. The impact will be felt more keenly in some sectors than others. It’s striking just how downbeat the hospitality industry is.

‘Late payment is a scourge – there’s no excuse’

“Late payment is a scourge, and one that shouldn’t exist. There’s no excuse, with modern business banking methods, for large companies to hold onto money due to small suppliers. Overdue invoices cause uncountable amounts of stress and harm to small business owners, leading to sleepless nights and lost productivity. Large companies should make their payment performance a board-level issue. And include it in annual reports, to improve accountability and transparency.

“Small firms contain the dynamism and the ambition to grow. That will get the economy up and running, if they are given the right conditions to flourish and invest.”