Cautious optimism continues to return for UK SMEs, according to new research

Close Brothers Asset Finance’s Business Sentiment Index (BSI), which measures SME business confidence, has risen modestly for the second consecutive research period, reversing 2022’s downward trend.

Unlike earlier in 2023, however, there were marked differences among the various sectors, with transport & haulage, construction, and services sectors experiencing a rise in confidence, while manufacturing & engineering, and print & packaging saw their BSI scores fall back after gains in the first half of the year.

The headwinds facing small and medium-sized firms have abated somewhat, with inflation falling back and energy prices stabilising. However, interest rates rises and cost of funds remain a concern for many business owners.

The BSI is based on the views of 911 business owners and senior members of the UK’s business community.

Appetite for investment

Overall, the appetite to invest remained stable, with three quarters of UK firms aiming to seek funding for investment in the next 12 months.

There were a number of modest fluctuations in sentiment, with the most notable change seen in transport & haulage, where the number of firms planning to seek funding fell by 19% to 62% (from 81%), while manufacturing & engineering remained strong at 81% (May 2023: 83%) and services rose from 63% to 71%.

Missed opportunities

The number of companies that have missed business opportunities because of a lack of available funding continued to fall, from 51% at the end of 2022 to 45% in May 2023 and 41% in September 2023.

We are starting to achieve more normalised levels for this question, last seen in May 2022, when 37% of respondents answered ‘yes’ to ‘have you missed a business opportunity in the last 12 months, due to lack of available finance?’

Economic outlook

Businesses continue to be more negative than positive about the macro-economic outlook, however, the gap between positive and negative sentiment has narrowed this year compared to 2022.

There was no change between May 2023 and September 2023 in the cumulative result. The construction sector saw the biggest swing to the positive with a 10% swing.

This indicator has contributed most to the decline in the overall BSI and it’s worth remembering that in November 2021 75% of respondents were positive about the economy – by December 2022 this had fallen to just 36% and has risen only 6 percentage points through 2023.

Predicted business performance

Predictions about future business performance continued to remain stable, with the majority expecting their prospects to remain unchanged.

The most notable rise in positivity is the construction sector, which saw an increase of 9% of firms expecting to expand.

Matt Roper (pictured), CEO of Close Brothers’ Commercial business, said: “It’s pleasing to see that positivity is continuing to return to the market, albeit not at the rate we would all like to see, but the reality is the UK’s SME community continues to face a wide variety of challenges.

“These include a stubbornly high rate of inflation, higher interest rates, and a sluggish economy impacting demand.

“It’s worth stating again that – in our experience – what business owners want, almost above all else, is consistency, which gives them the ability to plan and forecast effectively. Many of the recent challenges have been entirely unexpected, and after the difficulties of the past few years, it’s impacted their ability to grow.

“What continues to impress me, though, is firms’ appetite to invest in their future and the number expecting to expand in the coming year, and we’re looking forward to working with those business owners in the coming months and years.”