Rising interest rate threatens SME growth plans

Growth plans among SMEs maybe halted this year by the potential for rising interest rates, according to a survey

SMEs are struggling to grow because of rising interest rates

The potential for rising interest rates is stifling SMEs’ appetite for growth, a business barometer has found.

AXA Business Insurance found optimism remains healthy among small and medium sized enterprises in its latest annual Optimism Index, running at a steady 82%, but nearly one in ten fewer SMEs expect growth compared to a year ago.

Overall optimism was slightly lower among retail and distribution businesses at 79%, which also showed a big drop in growth expectations – while 71% said they were optimistic of growth last year, that now sits at just 58%.

Only construction and industrial companies were looking more confident about growth this year, possibly as a reflection of the fastest growth in house building that the UK’s seen since 2003.

SMEs’ appetite for recruitment has also suffered this year with a 40% drop in businesses planning to hire. Small retail businesses have taken the biggest hit, with only 15% planning to take on staff over the next 12 months compared to almost 50% this time last year.

A third of SMEs said the prospect of rising interest rates made them less optimistic and it was also a concern for construction and industrial businesses, with 41% citing it as a reason for diminished confidence.

Meanwhile, the economic situation in the Eurozone seems to be less of an issue than a year ago when over a third of SMEs considered this a dampener to their optimism, a figure that has dropped to just under a quarter this year.

Darrell Sansom, managing director at AXA Business Insurance said: “It’s good to see that, overall, optimism remains high; but we can’t ignore the drop in growth expectations.

“It could simply be that there was a dramatic surge of optimism last year as the economy started to pick up and that this has now settled to more realistic levels.

“But we also know from working closely with SMEs that things like difficulties in securing funding and invoicing terms from clients are holding many back from more ambitious plans for the future.

“Whatever the reasons, we want to see the UK’s SMEs – who are such powerful drivers of our economic recovery – make the most of our improving economic climate. Ensuring they have the protection they need to keep going through the good times and the bad is just a little thing that we can do to help.”

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