Interest rates and political uncertainty are holding back many businesses from investing in the long-term business growth the economy needs, according to new research from SME funder, Bibby Financial Services (BFS).

Data from BFS’s Q1 2024 SME Confidence Tracker, which surveyed 1,000 UK SMEs, shows that 53% of SMEs are putting off making major investments until interest rates fall, while 43% are delaying investment until after the next general election.

Despite this, research findings reveal green shoots of optimism for the second quarter of the year. The data show businesses are more optimistic this spring, reflecting wider economic indicators pointing to an improved outlook for the UK. The majority of SMEs (61%) predict an increase in sales over the next six months, compared to just 54% in Q1 2023, a +7 percentage-point uplift year-on-year.

Derek Ryan, UK managing director of Bibby Financial Services, said: “It’s evident that despite the challenges faced last year, confidence is returning among the UK’s 5.6 million SMEs. However, interest rates remaining at record levels since the financial crisis, and a forthcoming general election, are causing an investment freeze among these businesses.

“This will ultimately kick economic growth down the road. So, while the latest GDP figures offer some hope for the economy, more needs to be done to stimulate much needed investment in the short-term.”

BFSA says that delayed capital expenditure may be a result of an uncertain credit environment for small businesses, with over half (53%) saying that it’s more difficult to access finance today compared to six months ago, and 61% of SMEs stating that existing lenders have reduced their credit availability in recent months. Findings reflect a retreat from high street lending to SMEs, observed in the most recent Bank of England Financial Stability Report, BFS said.

Ryan said: “Despite increasing optimism among SMEs and some signs that the economy is improving, sustained growth is hanging in the balance. Amid a testing credit environment and the corporate insolvency rate hitting a 30 year high in 2023, SME supply chains remain under pressure. This is having a huge impact on the cashflow of businesses across the country.”

The resulting pressure on cashflow is compounded by customers failing to pay invoices on time, if at all. Two thirds (68%) say it’s taking longer for customers to pay invoices in full compared with a year ago. Meanwhile, nearly a third (30%) suffered a bad debt due to customer non-payment over the past 12 months.

BFS argues that it is therefore no surprise that 71% of UK SMEs cite economic growth and job creation as one of the top three critical issues facing their business ahead of the next general election. 65% believe that the most important outcome is that the winning party supports long-term business growth.

Ryan added: “While the government remains behind its 2% inflation target, business leaders are sensing the light at the end of the tunnel. But with SMEs making up 99.2% of the UK’s total business population, their current uncertainty and dampened investment risks impacting the country’s broader economic recovery.

“For the government, the question now is how it can give SMEs some much needed support and confidence in the long-term outlook for the economy, so they can act bravely and invest in growth.”