Declining Confidence and Growth Forecasts
SME confidence has taken a significant hit, with growth forecasts plummeting to levels reminiscent of the 2020 lockdown period. According to Novuna Business Finance, the percentage of small businesses predicting growth has fallen for four consecutive quarters, reaching a five-year low of 26%.
This decline is attributed to various factors but includes at its centre rising employer National Insurance contributions, uncertainty over tariffs, and fears of upcoming tax increases.
Whisper it quietly, but there are real concerns about this years Autumn budget and potential tax rises.
Sector-Specific Impacts
Certain sectors are experiencing more pronounced challenges. The manufacturing sector has seen a 1% decline in May, following a 0.7% fall in April, largely due to decreased activity in car manufacturing and pharmaceuticals. Similarly, construction output fell by 0.6% in May. These declines are contributing to a broader sense of uncertainty among SMEs operating in these industries.
While some SMEs are exploring opportunities in sectors like defence, the overall sentiment remains cautious. The combination of economic contraction, sector-specific challenges, and financial constraints is contributing to a challenging environment for SME growth in the UK.
Policy Responses and Outlook
And the response to these challenges? Chancellor Rachel Reeves has acknowledged (again) the disappointing economic figures and emphasised the government's commitment to stimulating growth.
However, there is growing concern among SMEs about potential tax increases in the upcoming Autumn Budget. The Confederation of British Industry (CBI) warns that such measures could further dampen business confidence and hinder recovery.
Financing Challenges Intensify
Throughout all this - access to financing remains a critical issue for SMEs.
A recent survey by Manx Financial Group revealed that nearly a third of smaller UK firms have paused or scaled back parts of their businesses over the last two years due to a lack of financing.
Areas most affected include hiring, research and development, product launches, marketing, and market expansion efforts. The cost of borrowing has soared since the Bank of England began hiking interest rates in 2022, and many small businesses are unable to obtain financing without shouldering crippling terms.
In response to the economic challenges, high street banks have increased lending to SMEs by 30% in the first quarter of 2025 compared to the same period in 2024. However, total SME lending remains below pre-COVID levels with traditional banks continuing to overlook SMEs and there are renewed calls for expanded government-backed loan schemes to support long-term investment.
Alternative Financing: Funding in uncertain times
As traditional banks continue to overlook SMEs, alternative lending solutions are emerging as a vital resource. By leveraging alternative financing options, which are currently used by less than 1% of SMEs, businesses can secure the capital needed to achieve their growth aspirations. When it comes to SMEs, there is no ‘one size fits all’. From the sole trader working alone on a market stall to the manufacturer with over 200 employees, the wants and needs of the entrepreneur vary considerably. Lenders must match each SME with the right finance.
About SME Capital
SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market and have dedicated Regional Directors based across the UK.
By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions.
