SMEs struggle under weight of rising costs

For small businesses the cost of financing remains higher than a year ago and has stayed higher than medium-sized companies as interest rates offered on new loans to small companies continues to increase.

Average interest rates offered to medium-sized enterprises fell back to 3.35% in May this year from 3.39% three months before and from 3.49% in May the year before.

But interest rates offered to smaller businesses stood at 4.84% in May up from 4.59% on average offered the year before.

Annual average cost inflation for SMEs climbed to 1.1% in quarter two this year up from 1% the previous quarter as the inflationary slowdown seen over the past six quarters was brought to a halt.

Despite these increasing external pressures small business owners’ confidence climbed for the fourth quarter in quarter three this year reaching its highest level since the first quarter of 2010.

But businesses remain reluctant to invest. SMEs expect to increase capital investment by 1.5% over the next 12 months which is well below the growth closer to 3% seen before the financial crisis.

Aldermore group commercial director Mark Stephens said: "Although this quarter saw a slight rise in annual cost inflation we expect this to fall back as the impact of increased wage growth levels out in the next quarter.

"It is interesting to note that although SMEs are experiencing higher confidence they are holding on to their cash and appear reluctant to invest.

“This suggests businesses are suffering from a case of the once bitten twice shy syndrome choosing to hoard their cash rather than invest it after the past five years of pain.”

Overall prospects for growth in the UK economy are looking up as economists have begun to revise their GDP estimates upwards.

HM Treasury now expects GDP growth of 1.3% this year and 2.1% next which are respectively 0.4% and 0.5% higher than three months ago.