FSB Voice of Small Business Index
Quarter 1, 2025
Infographics SBI Q1 2025
“Confidence picks up slightly following Q4 2024’s very low reading”
19.1%
of small businesses expect to reduce the number of people employed over the next three months
84.6%
of small businesses said their costs were higher in Q1 2025 than in the same period a year ago
27.6%
of small businesses which export expect the value of their exports to decrease over the next three months, with 9.6% of small exporters predicting a significant decrease in export value
Economist’s View
Small businesses expect performance to worsen again over the next three months, marking the fourth consecutive quarter of net pessimism.
Who can blame them? Payroll taxes went up in April, energy costs are already high and rising further, and access to finance has been tightened. At the same time, concerns around consumer demand are rising, in line with forecasts for subdued household spending over 2025.
A higher-than-average percentage of firms are operating below capacity, which, alongside higher labour costs, is contributing to falling headcounts. Investment is also falling, likely in part due to the higher cost and lower availability of financing.
Small businesses are not alone in feeling pessimistic. Business and household confidence are showing volatility, while global markets are currently in turmoil. Optimism was already in short supply due to the poor economic outlook and tightening fiscal policy, even before the US applied wide-ranging tariffs to the UK and almost every other country in the world. The prospect of a trade war with China – which was slapped with tariffs of up to 125 per cent on some goods by the US, and which retaliated in kind – will have potentially severe consequences for the entire global economy.
Small firms in the UK are more indifferent to this particular risk. Concerns over the global economy are below historical levels, while expectations are broadly positive for export performance in the next three months. However, it is worth noting that the survey fieldwork came ahead of the formal unveiling of tariffs on the UK.
Supply chains are likely to shift at an accelerated pace, not only due to the direct impact of the tariffs but also changing relationships and trade terms between other economic partners looking to mitigate the impacts of those tariffs. For instance, the UK could feasibly end up with better trade terms with the EU and Canada over the next few years.
Small businesses are well-placed to take advantage of the opportunities that instability presents. Leaner, less bureaucratic, and less hierarchical firms will likely display greater agility. Indeed, agility may be born from necessity. Small firms increasingly face a high cost and low-growth domestic environment, which has reduced their financial resilience. This combination of factors may lead to more small businesses turning towards the global economy to find ways to improve their fortunes or even to survive.
So, while the tough times will likely lead to further pain, with business death rates expected to remain well above pre-pandemic levels over the short term, we may also see a wave of survivalist entrepreneurship. This seems to play out in the stated growth ambitions of small business leaders. A larger-than-average proportion expect to contract or close their business in the next 12 months, but almost half expect to grow, with an above average percentage expecting to grow rapidly.
It is clear that uncertainty is here to stay. We have likely not yet seen the last of the US’s economic realignment agenda, nor the global reaction to it. At the same time, the UK is expected to grow at a subdued rate in the long run, leaving it more vulnerable to negative economic shocks. The firms that wait for things to change in their favour or for the situation to stabilise might end up stuck in a holding pattern, while those that react and look for growth opportunities may be more likely to take off.
Christopher Breen, Head of Economic Insight
Executive Summary
Key findings this quarter:
• The Small Business Index (SBI) rose to -40.7 in Q1 2025, up from -64.5 in Q4 2024, which had marked the lowest reading in over four years. The firmly negative SBI reading likely reflects significant concerns about the UK’s domestic economy, which is characterised by ongoing weak performance.
• All UK regions recorded a negative reading on the SBI in Q1 2025, reflecting widespread business pessimism. Nevertheless, sentiment across all regions showed a relative improvement compared to Q4 2024.
• Construction recorded the least pessimism among sectors, with an SBI reading of -18.7. All sectors reported a fall in pessimism from Q4, though none recorded a positive score.
• In Q1 2025, the net balance of small businesses reporting revenue growth was -25.4%. Expectations for future revenue growth improved, with a net balance of -8.4% anticipating an increase in revenue over the next three months, up from -25.9% on the previous reading.
• The export environment deteriorated further, as the net balance reporting growth stood at -6.0% in Q1 2025. A net balance of 0.8% of exporting businesses anticipate growth in Q2 2025, though we expect US tariffs to bring this value into negative territory.
• The net balance of small businesses reporting an increase in operating costs rose for a second consecutive quarter, reaching 81 0% Labour, utilities, and the tax burden continue to be the major causes of changing costs for small businesses.
• Small business headcounts failed to record growth on net for the twelfth consecutive quarter. Small businesses expect to decrease their headcount further in Q2 as the increase in employers’ National Insurance contributions and minimum wage rates come into effect.
• The share of small businesses aspiring to grow over the next twelve months increased, though the share seeking to contract remains at historically high levels.
• The share of unsuccessful credit applications almost doubled to 41.3%, whilst the average interest rate rose to 7.8%. Despite this, the share of small businesses applying for credit increased to 14.6% in Q1.
• Small businesses’ perceptions of credit availability and affordability worsened over the quarter. The credit index decreased by 2.7 points on Q4 2024 to -32.3.
• The net balance of small businesses expecting to increase investment improved significantly from Q4, though it remains negative at -2.8%.
UK Macroeconomic Overview
UK economy begins 2025 on weak path
According to the latest data from the Office for National Statistics, the economy grew by 0.5% in February. This followed a 0.1% contraction in January. Full-year data for 2024 showed growth of 1.1%, well below the prepandemic trend rate.
In the three months to February, output was up by 0.6%. Over this period, growth was driven by the services sector, which each expanded by 0.3%.
Despite the growth recorded on the most recent threemonth reading, the UK economy remains in a relatively
feeble position. It is facing up to several headwinds, including elevated inflation, continually restrictive interest rates, geopolitical risk, and policy changes.
As a result of these factors, Cebr forecasts another year of weak GDP growth this year, with the economy expected to expand by 1.0%. Amongst GDP components, business investment and exports are projected to have particularly weak years.
Figure 1: Monthly growth rates by sector of the UK economy, latest three months on previous three months
Source: Office for National Statistics
Small Business Index
Small Business Index rebounds from four-year low amid gradual economic recovery
The Small Business Index (SBI) rose to -40.7 in Q1 2025, up from -64.5 in Q4 2024, which had marked the lowest reading in over four years. While the index remains negative, indicating that more businesses expect conditions to worsen rather than improve, the latest reading suggests slightly less widespread pessimism. In Q1, 47.3% of small businesses expected worsening conditions, down from 55.1% in the previous quarter.
The firmly negative SBI reading likely reflects significant concerns about the UK’s domestic economy, which is characterised by ongoing weak performance. Such pessimism is corroborated by other SBI metrics, including revenue growth, for which the net balance of businesses
reporting an increase stood firmly in negative territory, at -25.4% in Q1 2025.
There remain significant risks to the outlook. These include labour market policy changes implemented from April and continually stifled demand conditions, which could weigh on business sentiment and lead firms to adjust their headcount decisions or investment plans.
There are international headwinds too. The recently announced 10% tariffs on nearly all UK exports to the US are the clearest example. Taken together, global and domestic challenges continue to pose significant risks to small businesses in the coming months.
Figure 2: The FSB Small Business Index:1 Small business prospects over coming three months Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
1 The Small Business Index is a weighted index of the responses to the question: ‘Considering your overall business performance, and ignoring any normal seasonal variations at this time of the year, how do you view business prospects over the next three months, compared with the previous three months?’ The share of firms reporting are given the following weightings: ‘much improved’ +2; ‘slightly improved’ +1; ‘approximately the same’ 0; ‘slightly worse’ -1; and ‘much worse’ -2; the Small Business Index is derived from the sum of these factors.
Figure 3: Year-on-year change in the FSB Small Business Index Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Figure 4: UK SBI against year-on-year UK GDP growth Source: ONS, FSB - Verve ‘Voice of Small Business’ Panel Survey
SBI (LHS) GDP growth (RHS)
Regional Small Business Indices
Regional sentiment remains unanimously negative
All UK regions recorded a negative reading on the SBI in Q1 2025, reflecting widespread business pessimism.2 A negative score means that the proportion of small businesses expecting an improvement in performance in the coming quarter was outweighed by the proportion expecting a worsening. Nevertheless, sentiment across all regions showed a relative improvement compared to Q4 2024.
Scotland had the largest improvement in sentiment in Q1 2025, having gone from being one of the three most pessimistic parts of the UK in Q4 2024. By Q1 2025, its score had risen sharply to -15.3 from -67.2 in Q4 2024, a 51.9-point increase. Though facing similar demand-
side pressures to the UK economy as a whole, several aspects of Scotland’s economy are performing better than average. For instance, the labour market is strong, with low unemployment and robust earnings growth.
In Q1 2025, the North West and London saw the nextlargest gains in sentiment, with SBI scores rising by 33.2 and 30.4 points, respectively. The North West had posted the weakest score in Q4 2024, while London’s improvement followed a particularly sharp decline in Q4 2024, which was the steepest of any region. At the other end of the scale, the East of England recorded the lowest SBI score in Q1 2025, at -59.2.
Figure 5: FSB Small Business Index – Regional variation in small business prospects over the coming three months
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Q4 2024 Q1 2025
Sector Small Business Indices
Pessimism over the coming three months endures, but fall observed across all sectors of the economy
On a sectoral basis, the SBI readings remained negative in Q1 2025. This marked the fourth consecutive quarter in which all sectors failed to record a positive score. The negative scores across the different sectors indicate continued pessimism amongst small businesses regarding their performance over the coming quarter. This is reflective of a weak outlook for the UK economy, with growth forecasts revised downwards in recent months. Similarly to the regional scores, all sectors reported reduced pessimism compared with the previous quarter. Construction recorded the least pessimism in Q1 2025, with an SBI reading of -18.7, up sharply from -76.8 in Q4 2024. There are likely two main factors contributing to the less pessimistic outlook in this sector. On the supply side, government reforms are likely to ease planning constraints and are expected to facilitate new housing developments. Meanwhile, the demand-side outlook may strengthen as a result of government approval for major infrastructure
projects, such as the third runway at Heathrow, the Luton airport expansion, and the Rampion offshore windfarm extension. The improvement in construction sentiment was corroborated by a rise in output for this sector on the latest quarter-on-quarter GDP data. Sentiment remains subdued, however, with the sector having struggled for momentum for some time.
At the other end of the scale, industries such as manufacturing saw much smaller improvements in business sentiment. This industry has been fluctuating between growth and contraction in most recent ONS monthly GDP readings. Meanwhile, in light of the recent increases to employers’ National Insurance Contributions, labour-intensive industries such as accommodation and food service activities and the wholesale and retail trade remain among those recording the highest levels of pessimism.
Figure 6: FSB Small Business Index by sector – small business prospects over the coming three months Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Accommodation and food service activities
Wholesale and retail trade
Financial Performance
Small businesses experienced a deterioration in revenue on net, with further declines expected
In the previous SBI survey, the net balance of small businesses expecting revenue growth in Q1 2025 stood at -25.9%. Businesses’ actual experiences of the quarter were broadly in line with their prior expectations, with the net balance of small businesses reporting revenue growth standing at -25.4%.
Q1’s negative balance indicates that the number of businesses reporting a decrease in revenue outweighed those reporting an increase. The last period to record a positive balance was Q1 2022, pointing to the continued struggles faced by the UK economy, and especially small businesses, since then. Moreover, Q1’s reading was the third lowest on record.
The reported decline in revenue in Q1, in part, owes itself to broader economic conditions. The economy exhibited
no growth in Q3 2024 and grew by a mere 0.1% in Q4. Growth is further expected to have been weak at the turn of the year.
Amongst surveyed sectors, wholesale and retail trade had, for a second consecutive quarter, the weakest net balance of businesses reporting a revenue improvement, with the figure standing at -39.3%. This likely reflects weak demand conditions at the moment, with consumption growth slow and consumers saving at a higher rate. However, the negativity was not only confined to consumer-focused parts of the economy, with no sector recording a positive net balance.
Looking ahead, more small businesses expect revenue to decrease in Q2 2025 than increase, with a net balance of -8.4% forecasting improvement.
Figure 7: Small business revenue, net percentage balance – Proportion reporting / expecting increase less proportion reporting / expecting decrease
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Net balance of businesses reporting an increase in revenue - last three months
Net balance of businesses expecting an increase in revenue - next three months
Exports
Exporters report deterioration in conditions and are at risk of facing continued struggles ahead
In Q1 2025, a net balance of -6.0% of exporting businesses reported an increase in the value of their exports. This is despite the latest trade statistics showing that UK exports in both goods and services rose in January 2025, suggesting that larger organisations fared better than the small businesses covered by this survey.
Looking ahead, small businesses anticipate a small increase in export value in Q2 2025. A net balance of 0.8% of exporting businesses expect growth in the value
of their exports. However, this survey was taken before the latest round of US tariffs were announced, including 10% on most goods imported from the UK, with higher tariffs of 25% on steel, aluminium, and automobiles. This threatens to significantly harm many UK exporters, and we expect small businesses to report a far more negative net balance in three months’ time. The extent to which this will be the case depends on the UK’s ability to negotiate exemptions from US tariffs, and the reactions of international markets.
Figure 8: Changes in value of exports over the previous three months and expectations for the coming three months; net percentage balance (proportion reporting increase, less proportion reporting decrease)
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Net balance of exporters reporting growth, past three months
Net balance of exporters expecting growth, next three months
Costs and Inflation
Cost pressures endure with little reprieve ahead
The net balance of small businesses reporting an increase in operating costs rose for a second consecutive quarter in Q1 2025 to 81.0%, from 79.8% in Q4. This takes the balance 1.4 points higher than the reading a year ago.
This finding aligns with the persistence of cost pressures throughout the economy. Rising costs are passing through to customers, as shown by higher consumer price inflation in recent months. After slowing to a near-term low of 1.7% in September 2024, CPI inflation has overshot the Bank of England’s target of 2%, coming in at 2.6% on the most recent reading. These elevated readings came before recent tax rises and bill increases came into effect, with such changes occurring from April onwards. These
dynamics point toward enduring cost pressures and threaten rising inflation, which will caution the Bank of England against aggressive monetary easing this year.
As has been the case in previous quarters, labour is one of the most widely cited sources of changing business costs, selected by 51.5% of respondents. It has been replaced by utilities as the most-cited, however, with 52.7% selecting this category in the face of escalating energy prices. Meanwhile, the tax burden saw a third consecutive quarterly increase in the share of businesses citing it as a cost pressure. In Q1 2025, 47.2% reported this as a cause of changing costs, up from 45.7% in Q4 2024. The increasing salience of this pressure is likely to increase further now that policies announced at the Budget have been implemented.
Figure 9: Small businesses reporting an increase in overall cost of operation over past three months, compared with the same period a year ago; net percentage balance
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Figure 10: Main causes for changing business costs* *Firms may give multiple answers
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Employment
Small business employee numbers extend contraction, with further layoffs expected ahead
A net balance of -12.6% of small businesses reported growth in employee numbers in Q1. The negative reading means that the number of businesses expanding their workforce was outweighed by the number of businesses reporting a contraction. This marks the twelfth consecutive quarter of net contraction on this metric.
The latest ONS data revealed that the unemployment rate is holding steady, at 4.4% in the three months to February, unchanged from 4.4% in the three months to November. Other labour market indicators have weakened recently, with job vacancies falling and wage growth easing.
Collectively, these developments point to a loosening labour market, in line with the sentiment expressed by small businesses.
Turning to the forward-looking measure, small businesses expect to decrease their headcount further in Q1 2025. A net balance of -8.9% of businesses expect to expand the number of employees over the next three months. This likely reflects rising labour costs as the increase in employers’ National Insurance Contributions and minimum wage rates come into effect with the start of the new financial year.
Figure 11: Net percentage balance change in number of people employed – proportion reporting increase, less proportion reporting decrease
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Growth Aspirations and Challenges
Survey shows reduced pessimism about growth prospects over the next 12 months, but businesses remain far from optimistic
In Q1 2025, the proportion of small businesses aspiring to grow over the coming year increased to 47.8%, from 43.4% in Q4 2024. The proportion of small businesses seeking to contract their operations fell by 6.3 percentage points to 17.9% in Q1. Although these movements indicate reduced pessimism, businesses remain far from optimistic. The previous quarter aside, the last period when a larger share of firms than this expected to shrink over the next 12 months was Q4 2020, which saw the resurgence of COVID-19 cases and a subsequent reimplementation of restriction measures.
When considering the net balance of businesses expecting to grow, the wholesale and retail trade recorded the weakest value, of 10.7% in Q4. As a labour-intensive sector, the relatively poorer outlook for wholesale and retail trade is likely the result of rising labour costs. The sector is also exposed to continually poor consumer demand.
In contrast, businesses in information and communication are the most optimistic, with a net balance of 50.5% seeking to grow over the next year. This fits with the official data, which show that the sector’s output growth is outperforming the economy as a whole.
Figure 12: Growth aspirations for next twelve months
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Concerns about the domestic economy remain the biggest challenge facing small businesses
The domestic economy topped the list of factors cited by businesses as potential barriers to growth yet again. This aligns with recent official data showing the economy growing at low rates and occasionally shrinking. Amongst businesses surveyed, 65.2% named this category as a potential barrier.
On a similar theme, consumer demand was the factor recording the largest increase in the citation rate, with 31.9% of small businesses selecting this factor, up from 28.0% in Q4 2024. Such concerns align with Cebr’s forecasts, which show weak GDP growth for 2025 and consumption expanding at an even slower rate.
Similar to last quarter, many small businesses remain worried about the tax burden and labour costs, which were the second- and third-most selected factors, respectively. These largely reflect unease over Government policy, including tax-raising measures announced at the Budget and the new Employment Rights Bill. There has been a decline in the proportion of businesses citing these factors relative to last quarter, however.
Other notable developments include increases in the proportion selecting utility costs (likely the result of rising energy prices) and access to finance as barriers to achieving their growth aspirations.
Figure 13: Potential barriers to achieving growth aspirations* * Respondents could select multiple answers
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Credit
Small businesses face tighter credit conditions despite base rate cut
Figure 14: Credit applications and interest rates offered Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Have you applied for credit in the past three months?
In Q1 2025, 14.6% of small businesses reported applying for credit, up from 14.1% in Q4. Amongst those making a credit application, the share of successful applications was down 7.4 percentage points, to 50.1%.
The share of applicants awaiting final decisions decreased on the quarter to reach 8.5%. The share of unsuccessful applicants increased substantially, rising by 18.4 points to 41.3% in Q1 2025.
The average interest rate offered to successful credit applicants increased to 7.8% in Q1 2025, up from 7.5% in Q4 2024. The proportion of credit applications receiving rates in the 6% to 7.99% range decreased sharply, falling to 21.5% in Q1, from 29.3% in Q4. In contrast, the share of applicants offered rates in excess of 11% rose on the quarter. These developments align with the Bank of England signalling that it is likely to slow the pace of rate cuts this year.
In general, the changes this quarter suggest that while the base rate has decreased, access to credit remains constrained, with small businesses facing higher average interest rates and a greater likelihood of being unsuccessful in credit applications.
15: Proportion of small businesses successful in their credit applications in the past three months Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Figure
Small businesses’ perceptions of credit availability and affordability worsen amidst tighter lending standards
Perceptions of credit availability and affordability worsened in Q1. This was likely due to a lower approval rate and an increase in the average interest rate offered. The credit index subsequently decreased by 2.7 points on the quarter, to -32.3.
The proportion of businesses expressing a positive attitude on credit availability and affordability was 12.2% in Q1, a 0.5 percentage point decrease on Q4. The share of respondents rating the availability and affordability of credit as ‘quite good’ decreased to 11.0%, whilst those rating it as ‘very good’ rose to 1.2%.
In contrast, the proportion of small firms with a negative attitude towards credit availability and affordability rose to 52.4%, having stood at 49.0% in Q4. Within this group, the share of respondents rating these factors as ‘very poor’ increased by 1.8 percentage points, while those rating them as ‘quite poor’ increased by 1.5 percentage points. Meanwhile, the proportion of respondents adopting a neutral stance decreased to 35.4% this quarter.
Figure 16: Indices of credit perceptions over time, a weighted net balance of those with negative responses subtracted from those with positive responses3
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
3
Investment
Investment intentions remain in negative territory
The share of small businesses planning to increase capital investment in the coming quarter increased sharply to 23.6% in Q1 2025, up from 18.3% in Q4 2024. Simultaneously, the proportion of businesses expecting to reduce their capital investment fell by 5.9 percentage points, down to 26.4% in Q1. Consequently, the net balance of small businesses anticipating increased investment improved significantly from -14.0% in Q4, though it remains negative at -2.8%.
As is true of other variables, the fact that investment intentions remain in negative territory suggests that sentiment remains far from optimistic. Small businesses are seeing more difficult access to finance and a range of other headwinds, including from policy, energy prices, the domestic economy, and geopolitical developments. The impact of policy and energy prices on operating costs is ultimately expected to leave lower levels of funds with which to invest, while the economy and the geopolitical situation are contributing to heightened uncertainty.
In line with being amongst the least pessimistic sectors, businesses in construction showed the highest net balance when considering investment intentions, recording a positive value of 14.3%. This likely reflects optimism about incoming tailwinds from changes to planning regulations and approval for major infrastructure projects. At the other end of the scale, accommodation and food service activities again recorded the most pessimistic expectations, with a net balance of -21.1% of respondents expecting to increase investment. The aforementioned factors of weak consumption growth and rising labour costs are likely major contributors to this.
Other sectors showing weak investment intentions include wholesale and retail, which is expected to suffer from similar headwinds to accommodation and food services, and the manufacturing sector. The latter is particularly exposed to monetary policy risks and geopolitical uncertainty, especially around tariffs in major export markets. These sectors recorded net balances of -15.1% and -17.5% respectively on the investment intention metric in Q1.
Figure 17: % of small businesses expecting to increase and decrease capital investment over next quarter, compared with the previous quarter
Source: FSB – Verve ‘Voice of Small Business’ Panel Survey
Methodology
This report is based on the March 2025 research survey of FSB members carried out by Verve. 1,414 responses were received. The data are weighted by regional gross value added to match the profile of small businesses across the UK. The survey was undertaken between 10 March 2025 and 24 March 2025.
Appendix
Summary data table
The Small Business Index weights strong responses (much improved or much deteriorated conditions) double and subtracts the weighted proportion of firms reporting deterioration in business prospects over the coming three months from the weighted proportion expecting an improvement.
The employment and revenue indicators are net percentage balances, with the proportion of firms reporting a decrease subtracted from the proportion reporting an increase.
Responses are also weighted according to regional gross value added.
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