By Claire West

Confidence among small businesses rose to its highest level in three years according to the latest Small Business Index from the Federation of Small Businesses (FSB) released today, with confidence rising across all parts of the UK and in most sectors.

The Small Business Index — the FSB's measure of confidence — reached 15.9 points in the second quarter; 9.6 points higher than at the start of 2013 and the second highest reading since the Index began in 2010.

Financial services firms report the highest confidence levels, possibly reflecting the recent peak of the FTSE 100. And despite recent output contractions in the manufacturing sector, small manufacturers are more optimistic about their prospects, suggesting that conditions in the sector are improving.

With house prices rising steadily in 2013 the report also shows that real estate firms confidence levels are improving. This could improve further in the coming months with the ‘Help to Buy' scheme announced at the Budget.

The Chancellor is due to deliver the Spending Review later in June and the FSB believes that he must use this opportunity to build upon these positive figures with initiatives for growth to keep confidence levels high for both businesses and their customers.

Following another quarter's results which show four in 10 firms that applied for finance were refused, the FSB wants to see the Spending Review set a clear plan for the Business Bank to improve competition in the banking sector and to help advise small firms on alternative finance providers. However, the report shows clearly that while Funding for Lending isn't getting finance to more businesses the rates offered are becoming lower.

Other key findings from the report show:

• More firms expect turnover to increase in the coming three months and more firms expect to grow their business in the coming year

• A larger number of firms expect to increase staffing levels in the coming three months, which should be further helped by the Enterprise Allowance announcement made at the Budget and due to come into force next year

• More small firms report rising exports, despite slow world trade growth, and export growth is expected to pick up further in the coming three months

• Retail businesses remain least confident, highlighting again why the FSB's Keep Trade Local campaign is so important

• Inflationary pressures from rising energy prices are the main driver of increased business costs, underlining why it is essential to ensure energy suppliers are forced to put an end to rollover contracts and pass on falls in the wholesale price of energy to small business consumers

John Allan, National Chairman, Federation of Small Businesses, said:

"After five consecutive quarters of year-on-year growth, confidence is moving in the right direction. Small firms want to employ more people and grow their business. They want to export and expect turnover levels to increase. This is all good news, but we must not be complacent. The Chancellor must use the Spending Review to build on this optimism. While there are positive signs, inflation and not being able to access finance will affect how quickly, and how much, small firms can grow and create jobs.

"We know inflation is likely to remain high for the coming 12 months, largely due to rising energy costs. This is why reform of the sector is so important and why it must provide transparency for small firms to choose the best tariff for them."