Small firms’ confidence has increased, but their investment intentions have fallen as the domestic economy and access to finance act as a barrier to growth, show the results from the quarter one 2013 ‘Voice of Small Business’ Index from the Federation of Small Businesses (FSB)
The report, which surveyed 2,686 people in the first quarter of 2013 showed a welcome increase in confidence, moving from a negative reading of -5.6 in Q4 2012 to +6.3 in the first quarter of 2013. However, this optimism was tempered with caution as fewer businesses expect to grow this year – down from 56 per cent in Q1 2012 to 54 per cent in 2013.
Firms cite the domestic economy, consumer demand and access to finance as the main barriers to achieving growth. Worryingly, a falling number of firms have approached the banks for finance – something the FSB believes must be addressed in the Budget, due on 20 March.
Year-on-year the number of businesses applying for finance has fallen from almost 23 per cent in Q1 2012 to 20 per cent in Q1 2013. In addition, the number of those that have been accepted has fallen back to 41 per cent from 44.5 per cent in Q1 2012.
Positively, and perhaps a sign that Funding for Lending is beginning to filter through, the businesses that did get the finance they applied for have seen the cost fall, with almost two in five small firms (38.6%) getting interest rates of less than four per cent on the credit they were offered. This figure is well up from 25 per cent of small businesses in the same quarter last year. At the other end of the scale, the share of firms being offered credit with interest rates of 11 per cent or more has fallen back to just 6.5 per cent of businesses, down from 17 per cent in Q1 2012.
The FSB has said that the Chancellor must use the Budget to put a firm plan in place for the Business Bank and outline how it intends to increase competition in the banking sector through traditional banks, but also by promoting non-bank finance. The FSB believes that to provide the necessary focus the Business Bank should focus on micro-business financing, longer-term and higher risk loan applications and advice.
Other key findings from the report shows:
- Small businesses expect to marginally increase their staffing levels over the coming three months
- Financial and business services firms remain the most optimistic about the business environment, while retailers and manufacturers expect conditions to deteriorate
- Eight regions have seen confidence increase year-on-year, with the north east recording the largest annual increase in their confidence reading of +15, while businesses in the southern regions retain strong optimism levels
- Fuel (56%) and utilities (51%) remain the main driver of increased business costs in the quarter
It is great news that confidence is beginning to edge up and is back in positive territory. This bodes well for GDP figures for Q1 and we would expect them to be better than the -0.3 per cent recorded in Q4 2012. However, we know that inflationary pressures are likely to persist in 2013, especially through rising energy bills and fuel costs and this will affect disposable incomes.
Two separate reports last week showed that lending to small firms remains constrained. This is something which must be addressed at the Budget. A clear plan for the Business Bank must be put in place to increase help ease access to finance and to boost competition in the sector, both through encouraging non-bank lenders such as peer-to-peer lenders to join the market and through new ‘challenger’ banks entering the arena.
Regulation has a key part to play. Measures must also be put in place to ensure that smaller banks can access the funding available on an equal footing so they can pass on the benefits to their small firms customers.