Recent research by independent SME funder, Bibby Financial Services (BFS), suggests that prevailing interest rates and political uncertainty are hindering many businesses from committing to long-term growth strategies vital for economic advancement.

The BFS Q1 2024 SME Confidence Tracker, based on a survey of 1,000 UK SMEs, indicates that a significant portion of businesses are deferring major investments until interest rates decrease, with 53% adopting this approach. Additionally, 43% of respondents are postponing investment decisions until after the next general election.

Despite these challenges, there are signs of growing optimism for the upcoming quarter. The data reveals that businesses are more positive this spring, with 61% of SMEs anticipating an uptick in sales over the next six months, compared to 54% in Q1 2023, marking a 7 percentage-point increase year-on-year.

Derek Ryan, UK Managing Director of Bibby Financial Services, said: “It’s clear that despite the hurdles faced last year, confidence is resurging among the UK’s 5.6 million SMEs. However, persistently high-interest rates since the Financial Crisis, coupled with an impending general election, are prompting a freeze in investment among these enterprises. This delay could potentially stifle economic growth in the foreseeable future. While the latest GDP figures offer some optimism, more concerted efforts are required to stimulate much-needed investment in the short term.”

The reluctance to engage in capital expenditure may be attributed to an uncertain credit landscape for small businesses, with over half (53%) indicating that accessing finance has become more challenging compared to six months ago. Additionally, 61% of SMEs report a reduction in credit availability from existing lenders in recent months, reflecting a retreat from SME lending observed in the most recent Bank of England Financial Stability Report.

Ryan further noted: “Despite the growing optimism among SMEs and signs of economic recovery, sustained growth hangs in the balance. Against a challenging credit backdrop and with the corporate insolvency rate reaching a 30-year high in 2023, SME supply chains remain strained, significantly impacting businesses’ cash flow nationwide.”

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The strain on cash flow is exacerbated by delayed invoice payments from customers, with 68% of SMEs experiencing longer payment periods compared to a year ago. Furthermore, nearly a third (30%) have incurred bad debts due to customer non-payment over the past 12 months.

In light of these challenges, economic growth and job creation emerge as top priorities for 71% of UK SMEs ahead of the next general election. Additionally, 65% believe that supporting long-term business growth should be a primary objective for the winning political party.

Ryan concluded: “While the Government remains committed to its 2 per cent inflation target, business leaders are cautiously optimistic. However, with SMEs constituting 99.2 per cent of the UK’s total business population, their prevailing uncertainty and subdued investment could impede the country’s broader economic resurgence. The Government must now consider how to provide SMEs with the necessary support and confidence in the economy’s long-term prospects, enabling them to make bold investment decisions for growth.”