By Daniel Hunter
Latest research by the Federation of Small Businesses (FSB) shows small firms are displaying cautious optimism heading into the New Year and a greater level of confidence compared to the same time last year.
While the Small Business Index — the measure of confidence in the sector — fell by 1.1 points against Q3 to record a score of -5.6, it is some 18.8 points higher than Q4 last year — just as the economy entered into double-dip recession.
The Small Business Index has been a good indicator of GDP, so with recent forecasts indicating that growth will continue to be slow in 2013, this slight optimism will provide good news. However, weighing against that optimism are the cost pressures which still face small businesses.
Those sectors that rely on discretionary spending are struggling as incomes remain squeezed. Almost two thirds of respondents cite the weak domestic economy as a block to achieving their growth aspirations, showing how the optimism felt comes with a health warning.
Fewer small firms applied for finance in the quarter, but in good news, of those that did a higher proportion were accepted — 49.3 per cent up from 42.8 per cent in Q3. This is a move in the right direction, but less than one in 10 respondents still consider credit to be easily available. The FSB wants to see the new business bank improve competition in the sector and promote alternative sources of finance — especially for more businesses to be able to bring forward investment decisions.
Investment is a priority for around a third of firms in the coming 12 months. The FSB hopes that the increase in capital allowances announced at the Autumn Statement means that this number will increase. By allowing small firms to invest up to £250,000 into their business without paying tax will hopefully provide enough of an incentive to bring forward investment plans.
Despite this cautious optimism, the FSB warns that the environment in 2013 looks to remain challenging as inflation and energy prices will continue to affect both households and small businesses' finances. The cancellation of January's 3p fuel duty increase will help firms, but the FSB believes that road-users need greater certainty to what their overheads will be from one budget to the next.
"This quarter's report shows cautious optimism from the UK's small firms," John Walker, National Chairman, Federation of Small Businesses, said.
"There's no doubt that it is still a tough environment and the Autumn Statement highlighted that it's going to be tougher for longer. However, small firms want to get on, grow their business and invest. We urged the Chancellor to put small firms at the heart of the Autumn Statement and many of his plans will help — especially raising the tax free investment limits.
"However, there is still more to do — especially around accessing finance. While more small firms have been accepted this quarter, it is clear from our research that others continue to struggle. Previous recessions have shown that demand for finance is at its highest during the recovery stage.
"The independent SME finance monitor concluded that businesses are unconfident that the banks will lend to them. The fact that fewer firms applied seems to corroborate this and further highlights the broken relationship between small firms and the banks. The small business bank needs to address this by opening up competition, especially if small firms are to bring forward investment plans."
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