Over a fifth (22%) of UK SMEs signalled rising costs as their biggest concern going into 2017, research from Bibby Financial Services (BFS) found.

In its Q4 SME confidence tracker surveyed 1000 British SMEs with an average turnover of £1.8m, between 7th November and 1st December 2016.

BFS found the number of businesses that saw rising costs as a significant challenge has doubled over the past 12 months, which the research attributed to the impact of a Brexit-driven rise in inflation and depreciation of the pound.

BFS said this was of particular concern for manufacturers with almost a third (29%) citing this as their biggest challenge.

Increasing competition (18%) and late payments (11%) were other key challenges that SMEs highlighted as impacting their businesses.

BFS said that as a consequence of rising costs, investment intentions have dropped as businesses adopt a more cautious approach.

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The research found over the next three months SMEs plan to invest an average of £49,237; less than half the level of intended investment in Q2 2016 (£101,919). Over the same period, investment from manufacturing businesses has fallen by 150%.

David Postings, global chief executive of Bibby Financial Services said: “Smaller businesses are becoming increasingly concerned about rising costs. We’re seeing more SMEs looking towards efficiency, rather than investment for growth at the start of 2017.”

“Rising costs fuelled by inflation and the drop in the value of the pound is a double edged sword for many businesses. The manufacturing industry has recently grown at the fastest rate for 25 years, fuelled by an uplift in exports due to the pound’s depreciation, but manufacturers that are reliant on importing goods and selling solely in the UK will see margins being significantly eroded.

“These businesses are facing the challenge of maintaining profitability while remaining price competitive. This equation is causing a headache for many businesses and we are seeing many SMEs start to tighten their belts and pull back investment.”

BFS also attributed the current economic uncertainty as giving SME owners ‘a crisis of confidence’. Over a quarter (28%) of SMEs said that they were holding off on investing in their businesses due to concerns about the UK economy, while over a fifth (22%) were not investing due to concerns about the wider EU economy.

While not using their revenues to invest, a quarter (24%) of businesses said that they planned on building up their cash reserves instead.

Postings said: “In little over six months we have seen investment intentions from SMEs halve. Faced with a heady cocktail of the impact of Brexit and an increasing lack of confidence, businesses are taking a more cautious approach. In some instances, perhaps worryingly, it appears that they could be bedding down to see out this uncertain period as they steel themselves for a bumpy ride as we near the self-imposed deadline by the government to trigger Article 50.

“While exporters are seeing a boost in overseas sales, this benefit only goes so far, as many businesses do not look overseas for opportunities. The UK is still too reliant on a consumer driven economy that has all the signs of slowing down. This prop won’t last for long.”