Britain’s small and medium-sized enterprises remain deeply anxious about the prospects for their businesses, new research from Close Brothers reveals, with few firms confident they will grow during the course of 2018. Their nervousness reflects concern about the outlook for slower growth from the UK economy, as well as barriers that threaten to hold their businesses back
The latest Close Brothers Business Barometer, a quarterly indicator of business sentiment, shows that just 17 per cent of SMEs expect their business to expand over the next 12 months, with 52 per cent anticipating static growth. And while only 11 per cent of firms expect to contract or even to slow down, a further 20 per cent say they don’t know how the year will pan out, underlining the heightened levels of uncertainty facing many businesses.
In part, this mixed picture stems from SMEs’ lack of faith in the broader economy, with only 19 per cent of firms currently feeling confident that the UK is on a steady upwards trajectory. And while 22 per cent think the path to prosperity is established, albeit slow, some 14 per cent fear a further decline.
Individual SMEs continue to face a broad range of challenges that threaten to inhibit their ability to grow over the next year. The most common barriers to growth are competition in the marketplace, and economic conditions but a range of other concerns are also common. SMEs point to an inability to invest in staff or equipment, the high cost of finance, restricted cash flows and regulation as factors standing in their way. Skills shortages are also a headache for significant numbers of firms in the Close Brothers Business Barometer.
The heightened levels of anxiety amongst SMEs are likely to prompt caution over the next 12 months, with businesses reluctant to take on additional risk. Just 22 per cent of firms intend to seek funding for business investment during 2018, while only 25 per cent have plans to take on new staff during the year ahead.
Close Brothers’ research is in line with other indicators of SME sentiment, with the mixed outlook for growth amid ongoing volatility and uncertainty, including the Government’s Brexit negotiations, continuing to cloud firms’ view of the future. For example, the Federation of Small Business recently warned that confidence amongst smaller businesses in the UK has fallen significantly in recent months, with relatively few firms seeing any prospect of a near-term improvement.
More optimistic firms will point out that the UK economy continue to surprise on the upside. The economy grew by 0.4 per cent during the final three months of last year according to the Office for National Statistics, ahead of many economists’ predictions. The dominant services sector performed particularly stronger.
Nevertheless, 2017 was the weakest year for the economy since 2012, with growth coming in at just 1.7 per cent, down from 1.9 per cent in 2016. Consumer-facing businesses found the going particularly tough, while the construction industry contracted over the year as a whole.
Looking forward, economists expect the weak growth to continue. In a recent Financial Times poll of more than 100 economists, fewer than half predicted the UK economy would expand by more than 1.5 per cent this year, while the Office for Budget Responsibility is anticipating 1.4 per cent for 2018 as a whole.
This slow progress is reflected in SMEs’ experience of conditions on the ground. Only 19 per cent of SMEs in the latest Close Brothers Invoice Finance Business Barometer say business is improving, while a further 19 per cent say they see opportunities but don’t have access to finance to exploit them. By contrast, 39 per cent of SMEs say business has not improved since a year ago, while 14 per cent report a deterioration in conditions or warn they may be forced to shut down.
Many SMEs therefore face a difficult challenge as they seek to position themselves for the year ahead in this difficult environment. While they will need to be ready for growth opportunities that do present themselves, they should also be wary of taking undue risk. A strong balance sheet will prove invaluable in this context, providing SMEs with the means to weather any storms that materialise while keeping one eye open for better weather. It also makes sense to consider the widest possible range of funding options – alternative forms of finance may provide greater agility and flexibility than traditional bank funding.