Small business (SME) optimism is faltering as sticky inflation, labour shortages and rising borrowing costs pile pressure on firms already stretched by thin margins and political uncertainty.
Small business confidence dipped in September, with recent Opinium polling suggesting that UK entrepreneurs are increasingly uneasy about the months ahead.
The latest figures from the National Federation of Independent Businesses (NFIB) showed the small business optimism index falling two points to 98.8, while the uncertainty index jumped to 100, one of the highest readings in more than half a century.
While most small firms still describe their business conditions as “good”, they remain wary of persistent cost pressures and an unpredictable policy environment.
“While most owners evaluate their own business as currently healthy, they are having to manage rising inflationary pressures, slower sales expectations, and ongoing labour market challenges”, argued NFIB chief economist Bill Dunkelberg.
Inflation sticks above target
Inflation in the UK held at 3.8 per cent in September for the third consecutive month, well above the Bank of England (BoE)’s two per cent target.
Core inflation, which strips out food and energy, eased to 3.5 per cent, but the headline figure remains among the highest in the Group of Seven (G7).
Analysts say the prolonged period of elevated prices risks embedding inflation expectations and delaying rate cuts until late 2026.
Douglas Grant, group chief executive at Manx Financial Group, said: “For the UK’s 5.5 million SMEs, these rising costs are hitting from all directions. Many have exhausted cash reserves built up during the pandemic and are now operating on thin credit lines, leaving them exposed to prolonged inflation and elevated interest rates”.
Recent policy decisions, including higher National Insurance contributions, have further fuelled cost pressures.
With energy use set to climb as winter begins, Grant warned that manufacturing, hospitality and retail firms face “a real risk that inflation at this level could further impact growth and force viable small businesses to cut back or close altogether”.
The Office for National Statistics noted that September’s price data showed little sign of easing.
Petrol and airfares were the largest upward contributors, while Rachel Reeves conceded that the government “must support the Bank of England in bringing inflation down”.
Rising costs and low confidence
NFIB data paints a picture of cautious resilience. Fourteen per cent of small business owners identified inflation as their biggest problem in September, up three points from August, while almost a third plan to raise prices over the next three months.
Supply chain pressures also worsened, with 64 per cent of firms reporting disruptions, a ten-point monthly rise.
Hiring remains a sticking point, with 18 per cent of owners cited labour quality as their top concern, tied with taxes, while nearly a third reported unfilled vacancies.
Of those hiring, 88 per cent said they found few or no qualified applicants. Even so, 16 per cent plan to create new jobs in the next three months, which is the highest level since January.
What’s more, wage growth continues to drive up costs.
A net 31 per cent of small firms reported raising pay in September, with another 19 per cent planning further increases.
Rising borrowing costs are compounding the challenge: average short-term loan rates have climbed to 8.8 per cent, and more firms say credit conditions are tightening.
Meanwhile, Capital investment remains subdued, as just over half (56 per cent) of SMEs made any capital outlays in the past six months, mostly on vehicles and equipment.
Meanwhile only 21 per cent plan to invest in the near term, a signal of caution about future demand.
Fragile SME growth
Despite their outsized contribution to the UK economy, SMEs account for 99 per cent of private sector firms, 60 per cent of employment, and 52 per cent of turnover, many are struggling to adapt to an environment of weak growth and high costs.
Political uncertainty has only added to the unease. Since Labour’s landslide election win in 2024, business groups have expressed frustration over rising taxes and limited relief for smaller firms.
Recent polling by Conservatives for Business found that 59 per cent of SME leaders lack confidence in the UK economy, while more than half say profitability has declined since last summer’s election.
Energy prices, business taxes, and red tape were cited as top concerns. Economists have warned that the combination of persistent inflation and policy uncertainty could choke off investment and hiring just as the recovery stalls.
Schroders economist George Brown added: “High inflation is at risk of becoming entrenched in the UK, due to disappointing productivity and sticky wage growth”.
For now, small business owners remain characteristically resilient, but it appears that patience is wearing thin.
As Grant from Manx Financial Group noted, “sustainable recovery depends on a thriving SME sector”.
Without a clearer route to lower inflation and stable costs, many may soon find that resilience tested to its limit.