More small firms in Britain now expect to shrink, sell up or close over the next year than expect to grow. That is not a figure of speech. In the Federation of Small Businesses’ second-quarter survey, 18 per cent anticipated growth and 32 per cent anticipated contraction, sale or closure.
The resulting net balance of minus 14 per cent is the weakest in the history of the FSB’s Small Business Index, which began at the end of 2014. It narrowly beats the minus 13 per cent recorded in the final quarter of 2025. The balance first turned negative a year ago and has stayed below zero ever since.
What the Quarter Actually Looked Like
Confidence surveys measure expectation, which can be talked up or down. The trading figures in the same release are harder to argue with.
Just 22 per cent of small firms reported an increase in takings over the previous three months. More than half, 55 per cent, reported a fall. That is not a cautious mood, it is a contraction in actual revenue across a majority of respondents.
Nor does the outlook improve. Under a quarter of small firms, 23 per cent, expect revenues to rise in the coming quarter, while 48 per cent expect them to fall. Both numbers have deteriorated from the first quarter, when the equivalents were 25 per cent and 45 per cent.
Costs Are Still Climbing
The cost side explains a good deal of the mood. The proportion of small businesses reporting higher running costs than the same period a year earlier rose from 87 per cent in the first quarter to 89 per cent in the second. Three in ten, 30 per cent, said their costs had risen by more than 10 per cent, up from 26 per cent in the previous quarter.
The composition is the useful part. Taxation was the most cited driver of cost increases at 58 per cent, followed by fuel at 55 per cent, utilities at 54 per cent and labour at 53 per cent.
Taxation leading that list is worth pausing on, because it is the only one of the four a firm cannot negotiate, hedge or shop around for. A business facing higher fuel or utility costs can change supplier, change usage or pass some of it on. A business facing a higher tax bill can do none of those things in the short run.
It also sits against a slightly better external picture on two of the other three. Input cost inflation in manufacturing eased to a five-month low in July, and the government has since announced a temporary cut in VAT on domestic electricity. Neither of those had fed through when this survey was taken.
What Firms Say Is Holding Them Back
Asked what would act as a brake on growth over the next year, small businesses named the domestic economy first, at 64 per cent. The tax burden came second at 40 per cent, and labour costs third at 33 per cent.
That ordering matters for anyone reading this as a policy problem. The single largest constraint firms report is not a specific measure that could be reversed. It is aggregate demand. A business whose customers are spending less is not fixed by a rates adjustment, though a rates adjustment still helps its cash flow.
The second and third, though, are both direct costs of employing people and operating premises, and both are set by decisions rather than by markets.
The FSB’s Own Reading
Tina McKenzie, the FSB’s policy chair, framed the finding as something that should not be normalised. “We cannot and must not accept a new normal where more small firms believe they will shrink, sell up, or close entirely than anticipate growing over the next year,” she said. “Small firms are the only engine of growth present in each and every postcode and we need them firing on all cylinders.”
On policy she was specific. “The unforced errors on business rates made at the last Budget clearly need to be revisited and reworked,” she said, welcoming comments made by Andy Burnham on the subject. She also pressed for the new Commercial Payments Bill to be prioritised and given a day-one commitment, noting that progress on late payments had been “present but pedestrian”.
Late payment is the least discussed item on that list and arguably the most immediate. A small firm waiting on invoices is financing its customers, and it is doing so at a moment when the cost of its own borrowing has not fallen.
How to Read This If You Run One
Three things follow, and the first is a caution about the survey itself.
A net balance is a distribution, not a forecast. Eighteen per cent of firms expect to grow, and they exist in the same economy as the 32 per cent that do not. The index describes a spread of outcomes widening, not a uniform decline, and the practical question for any individual business is which side of that spread its own numbers place it on.
Second, the cost data gives a usable benchmark. If your running costs have risen by less than 10 per cent year on year, you are in the majority. If they have risen by more, you are in the 30 per cent, and the drivers most likely to explain it are tax, fuel, utilities and labour in that order.
Third, the revenue figures are the ones to act on. With 55 per cent of firms reporting falling takings and 48 per cent expecting further falls, a business planning on flat revenue is planning against the run of its peer group. That argues for reviewing pricing and payment terms now rather than after the next quarter confirms it.
Why Late Payment Belongs at the Top of the List
Of everything the FSB raised, late payment is the item most within reach of a change in rules rather than a change in the economy, and it is the one that hits the balance sheet fastest.
The mechanics are simple and unforgiving. A small firm that has delivered work and issued an invoice has already paid for the labour, the materials and the overheads involved. Until that invoice is settled it is funding its customer’s operations out of its own working capital. Where the customer is a substantially larger business, the effect is a transfer of financing cost from the party that can borrow cheaply to the party that cannot.
That transfer is more expensive now than it was. With Bank Rate at 3.75 per cent, and with the Monetary Policy Committee split three ways against holding it there, the overdraft or invoice finance a firm uses to bridge the gap costs materially more than it did during the period when the index last read positive. The same delay in days is a larger cost in pounds.
It also interacts with the revenue picture in the survey. A business with 55 per cent of its peer group reporting falling takings has less cushion to absorb a payment run that slips by thirty days, and fewer options if it does. This is the mechanism by which otherwise viable firms end up in the 32 per cent that expect to close.
The FSB’s ask is procedural rather than dramatic: prioritise the Commercial Payments Bill and commit to bringing its measures into force immediately rather than eventually. On the evidence of this index, the eventual timetable is the part small firms cannot afford.
What Would Change the Number
The index turned negative a year ago and has not recovered since, which suggests this is a level rather than a dip. Two things would move it.
One is the domestic economy, cited by 64 per cent, which no single measure controls. The other is the cost base, and there the pending decisions are identifiable: business rates, the treatment of employment costs, and whether late payment rules acquire teeth.
Until at least one of those moves, a survey that finds more firms planning to close than to grow is likely to keep finding it.
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