Recent industry surveys and reports have highlighted a notable increase in optimism and a stronger desire for funding among small and medium-sized enterprises (SMEs) in the UK. This shift is evident across various sectors, indicating a renewed confidence despite various economic challenges.

 

Assessing business confidence

According to Close Brothers Asset Finance’s Business Sentiment Index (BSI), SME business confidence has risen for the first time since September 2021, following three consecutive declines. The previous downturns were primarily due to rising inflation, escalating energy costs, and higher interest rates. However, the report states that with wholesale energy prices falling from their summer 2022 peaks and a clearer understanding of interest rate trends, SMEs are now able to plan with more certainty.

The change in confidence is driven by businesses prioritising growth (28%) and cost management (26%), rather than focusing on debt repayment (9%) or consolidation (9%). This shift in priorities underscores the resilience and forward-looking nature of UK SMEs.

Additionally, the appetite for investment remains robust, with three-quarters of UK firms planning to seek funding for investment in the next 12 months, an increase from 67% in July 2022. This positive trend is particularly notable in the transport and haulage sector, where the number of firms seeking funding has risen by 9% to 81%, and in manufacturing and engineering, where it remains strong at 83%. In contrast, the services sector saw a decline from 76% to 63%.

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Accessing finance

Despite the overall improvement, 45% of companies reported missing business opportunities due to a lack of available funding in May 2023, down from 51% at the end of 2022. While this is an improvement, it remains a historically high figure, highlighting ongoing perceptions of difficulties in accessing finance. For instance, in May 2022, 37% of respondents indicated they had missed opportunities due to financial constraints.

Predictions about future business performance have remained stable, with the majority of firms expecting their prospects to remain unchanged. Notably, fewer firms predict contraction compared to earlier in the year (10% versus 15%).

In other positive news, Purbeck Insurance Services reported that more small businesses applied for finance to support growth initiatives in Q2 2024 than at any other time in the past three years. According to their analysis, 19% of small business owners secured personal guarantee-backed loans for growth initiatives, although loans for working capital decreased to 31%. There was also a 69% increase in applications for Personal Guarantee Insurance for Small Business Loans in Q2 2024 compared to Q2 2023.

After a prolonged period of declining confidence, it is encouraging to see a resurgence of positivity in the market. My view is that any lack of appetite for providing business finance is confined to the high street banks; specialist lenders and challenger banks are active in the market and are doing plenty of business. Indeed, at LHV Bank, we’ve doubled the size of our loan book in just over six months.

 

Wider indicators

Looking at other trends, the Office for National Statistics (ONS) has now reported three months of straight house price increases, which suggests rising confidence in the housing market. As this official data lags behind other house prices indices, we are yet to see the effects of the period of the general election campaign; Nationwide and Halifax both reported a cooling in buyer demand during this time, but expectations are that this will be temporary.

Of course, inflation is still an issue and the fact that there was no movement in the official rate in June has led to lower expectations of an August interest rate cut. Some forecasters are predicting that we could possibly only see one bank rate reduction this year.

Despite this, PwC has upgraded its growth forecast for the UK’s economy, now expecting GDP to expand by 1% this year, double its previous prediction of 0.5%. The firm also forecasts a 1.7% growth in 2025 and 1.8% in 2026, suggesting a more optimistic economic outlook than previously anticipated.

These various indicators point to a growing sense of optimism and a stronger desire for funding among UK SMEs. Despite challenges, SMEs are increasingly looking to invest for growth, driven by a clearer economic outlook and improved access to finance, especially from specialist lenders. This renewed confidence is essential for driving economic recovery and long-term growth in the UK.