FSB
Quarter 1, 2026
Infographics SBI Q1 2026
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Confidence still strongly negative despite a slight rise, amid cost concerns and weak revenues
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of small businesses expect to contract over the next twelve months (i .e . shrink, sell up, or close the business) 46.4% of small businesses rate the overall availability and affordability of new credit for small businesses as poor
FSB Foreword
Although a minor improvement in confidence is far better than the alternative, sentiment among the small business and self-employed community remained suppressed in the first quarter of 2026, driven by the prospect of mounting costs from Q2 onwards, stemming in large part from policy decisions made by ministers. After eight consecutive quarters of negative readings, the outlook for small business growth is bleak, and growth in the economy will not come from relying just on the UK’s large corporate firms. We are increasingly seeing a divergence between corporate boardrooms relieved at not being targeted at the Autumn Budget or Spring Statement, and the grassroots economy with SMEs picking up new costs and risks.
The geopolitical upheaval caused by the outbreak of conflict in the Middle East must also be recognised as an aggravating factor on scheduled cost increases, supply chain pressures and disruption, and a general worsening of the global economy, with some forecasters – including the International Monetary Fund – warning that the UK will be especially exposed to negative consequences compared with other advanced economies.
Small firms and self-employed people, with their thinner financial cushions and reduced ability to absorb higher overheads or hedge prices for vital inputs, are likely to face a disproportionate financial impact from the crisis in the Middle East. Fuel has jumped from being cited by over a quarter of small firms (27.4%) as a driver of cost changes in Q4 2025 to being listed by nearly two in five in the most recent survey (38.3%); over the same time period, fuel costs’ salience as a barrier to growth aspirations leapt from just one in 16 small firms (6.0%) in the previous survey to around one in seven (14.8%) in the first quarter. FSB has already called for specific interventions on heating oil and fuel duty, as the first elevated new cost concerns arriving on top of the costs stack landing in Q2. Even taking global conflict out of the equation, small businesses already have a lot on their plate, and need a cushion to absorb the costs kicking in from April onwards. The small firms that play such a vital part in local communities and high streets, employment levels, and supply chains, are needed to drive the UK’s hopedfor economic recovery – but they won’t be there without support.
Without changes to business rates, help with energy costs and a Statutory Sick Pay rebate, it leaves them in a very vulnerable place. Seven in eight small businesses (86.7%) report that their cost of doing business is higher than this time a year ago, the highest reading on this measure for three years.
The numbers in this edition of the Small Business Index tell a brutal story, and behind every one of these numbers are business owners who go to bed every night wondering if and how they can make it work. Over half (53.5%) of small businesses reported a fall in revenues over Q1, while under half as many (24.5%) registered an increase. Unless we start to see revenue increases to keep pace with higher costs, the growth prospects for the small business and self-employed community will not improve. We should be encouraging more people to take the leap and start their own business, while existing businesses want to hire, invest and grow. But they cannot do any of that when they are busy worrying about debilitating and unpredictable cost hikes.
There was a bright spot amid the overall turbulence and headwinds of the first quarter, in the shape of the Government’s landmark announcement in late March on reforms to tackle late payment. This is a huge win for FSB, which has designed and campaigned for tighter rules to stop the scandal of withheld payments for legitimate invoices for many years. The King’s Speech in mid-May must set out an accelerated timetable for the introduction of the badly-needed legislation, as the UK is unique in being a place where late payment has been considered as acceptable.
The Government must tackle rising costs head on and give firms the support they need to take on staff and plan with confidence. Without that, these early signs of recovery risk slipping away before they’ve had a chance to take hold.
Tina McKenzie, Policy Chair, Federation of Small Businesses
Small Business Index
Small Business Index indicates continued pessimism despite slight improvement
The Small Business Index (SBI) rose to -52.5 in Q1 2026, up from -70.6 in Q4 2025, which had marked the lowest reading since the pandemic and the second-lowest on record.
The persistence of pessimism among small businesses reflects ongoing concerns about the weak performance of the UK economy. Other SBI indicators reinforce this subdued outlook. A net balance of 29.1% of businesses reported a decline in revenue growth in Q1 2026, highlighting continued weakness in demand conditions. At the same time, 30.1% of firms indicated plans to downsize, close or transfer ownership over the next 12 months, pointing to mounting pressures on business viability.
Looking ahead, the outlook for 2026 remains fragile. Domestic challenges, alongside international headwinds, are likely to weigh further on small business sentiment. In particular, the ongoing conflict in the Middle East will result in firms facing higher operating costs due to increases in fuel and energy prices, which could further constrain profitability and investment.
Figure 1: 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 2: Year-on-year change in the FSB Small Business Index, rolling four-quarter average
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Figure 3: UK SBI against year-on-year UK GDP growth
Source: ONS, FSB - Verve ‘Voice of Small Business’ Panel Survey
Regional Small Business Index
Business sentiment remains negative despite regional variation
In Q1 2026, small business sentiment remained firmly negative across all UK regions, suggesting that firms are facing sustained and compounding pressures. The persistence of weak sentiment suggests that businesses continue to face a challenging operating environment characterised by elevated costs, subdued demand and prolonged uncertainty, limiting confidence in near-term economic prospects.
While sentiment remained negative nationwide, there was notable regional variation. London saw the largest improvement in its SBI reading, rising by 31.7 points on the quarter. It remained firmly in negative territory overall, however, standing at -31.3. In contrast, the East Midlands and West Midlands continued exhibiting particularly weak sentiment. The West Midlands recorded the most
pessimistic business sentiment at -71.6 in Q1 2026, although this is a slight improvement from -82.6 in Q4 2025, while the East Midlands followed closely behind at -68.1. The negative outlooks are likely due to the regions’ higher concentration in manufacturing sectors, making them more vulnerable to cost shocks from the ongoing conflict. Scotland was the only region where sentiment actually worsened from the previous quarter.
Overall, the regional pattern of sentiment in Q1 2026 highlights an uneven economic landscape, where modest improvements in some service- oriented regions have been outweighed by entrenched pessimism in areas with greater exposure to manufacturing and energy-intensive activity.
FSB - Verve ‘Voice of Small Business’ Panel Survey
Figure 4: FSB Small Business Index – Regional variation in small business prospects over the coming three months2
Sector Small Business Index
Weak outlook for business prospects persists across all industries
From a sectoral perspective, business sentiment remained uniformly negative across all major industries in Q1 2026, marking the fourth consecutive quarter of negative readings, suggesting that underlying pressures remain firmly in place. However, there was a modest improvement compared to the previous quarter, with all sectors recording some recovery in their SBI scores.
The construction sector reported the weakest outlook at -76.8, reflecting a combination of structural and cyclical factors within the UK economy. Elevated interest rates over 2025 reduced mortgage affordability and discouraged property purchases, leading to weaker demand for new housing, and the sector continues to face elevated costs as prices of key inputs have been elevated.
In contrast, accommodation and food service activities recorded a relative improvement of 41.5 percentage points from the previous quarter, to a reading of -62.6. This reflects a gradual recovery in purchasing power prior to the shock in the Middle East. However, the sector remains highly exposed due to its labour-sensitive nature and its reliance on minimum-wage workers. Policy changes that took effect from early April 2026, such as the hikes to the National Minimum and Living Wages, the extension of Statutory Sick Pay to the first day of illness, and freezes to income tax thresholds, are likely to disproportionately affect hospitality firms. Hence, the improvement in sentiment may prove fragile.
Figure 5: FSB Small Business Index by sector – small business prospects over the coming three months
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Revenue Performance
Revenue performance remains weak despite partial recovery
Small business revenue performance showed a modest improvement in Q1 2026. The net balance of firms reporting revenue growth increased from an all-time low of -34.9% in Q4 2025 to -29.1% in Q1 2026. However, this figure remains firmly negative, indicating that underlying demand remains subdued.
The weakness in revenue performance is closely linked to soft consumer demand. This is also reflected in other indicators. For instance, the YouGov/Cebr Consumer Confidence Index declined from 107.9 at the beginning of the quarter, to 105.8 by the end, pointing to a
deterioration in household sentiment. Such findings reflect continued cost-of-living pressures, which constrain discretionary spending and reduce demand for goods and services provided by small businesses.
Looking ahead, the net balance of small businesses expecting revenue growth stands at -20.2%, indicating that firms anticipate continued weakness in demand conditions. This forward-looking negativity likely reflects a combination of subdued consumer confidence and uncertainty surrounding the global economic environment.
Figure 6: 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
Export performance stays consistently negative
In Q1 2026, export performance among small businesses remained firmly negative. The net balance of firms reporting growth in export values fell to -31.5%, representing a deterioration of 11.7 percentage points compared with Q4 2025. This decline reflects a continued weakening in external demand.
Within the net balance figure, the proportion of businesses reporting increased export values dropped sharply, from 24.4% in Q4 2025 to 15.1%. The ongoing weakness highlights the challenging global trading environment facing UK small businesses. Elevated input and energy costs continue to erode competitiveness, while heightened geopolitical uncertainty has weighed on confidence among consumers.
Despite the deterioration in current performance, forward-looking indicators point to a modest easing in pessimism. The net balance of firms expecting export growth in the coming quarter improved to -15.2%, suggesting that while expectations remain negative overall, fewer businesses anticipate further declines compared with Q4 2025. This likely reflects the perennial optimism of small business owners, and in fact, looking ahead, the scale of the headwinds facing exporters suggests that any recovery in small business export performance is likely to be gradual and highly dependent on improvements in global economic conditions..
Figure 7: 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
Costs and Inflation
Taxation and labour costs continue driving elevated operating costs
Taxation and labour cost pressures from Q4 2025 have largely persisted into Q1 2026. They remain the two most frequently cited sources of cost increases, at 58.3% and 55.9% respectively, slight declines from 63.6% and 56.0% in Q4 2025. This could be because new business rates are set to kick in along with increased dividend taxes. Labour costs are expected to remain amongst the main sources of pressure for businesses looking ahead, despite the labour market showing signs of gradual cooling. Wage growth is still elevated compared to historical norms, while policy measures, including higher National Insurance contributions introduced a year ago, the continued freeze of thresholds for their payment, and recent changes to wage floors, are all contributing.
A net balance of 81.6% of small businesses reported increases in operating costs in Q1 2026 compared with the same period last year. Besides the aforementioned taxation and labour cost pressures, the share of respondents citing fuel and utilities as amongst the main causes of cost changes rose on the quarter, reaching 38.3% and 53.3% respectively. These cost pressures are closely linked to the ongoing geopolitical conflict, which has disrupted global energy markets, contributing to volatility in oil and gas prices. These pressures are likely to persist over the medium term.
Figure 8: 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 9: Main causes for changing business costs* *Firms may give multiple answers
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Employment Employment outlook remains weak despite slight improvement
The employment outlook for small businesses remained subdued in Q1 2026, despite a modest improvement compared with the previous quarter. The net balance of firms reporting changes in their workforce increased to -14.2%, up from -20.9% in Q4 2025. While this indicates some easing in labour market contraction, the balance remains firmly negative, signalling that more firms are reducing headcount than expanding it. This improvement reflects some stabilisation of employment pressures. Fewer businesses are reporting workforce reductions at the margin, as the proportion of firms reporting a decrease in employment fell from 26.0% in the previous quarter to 22.7% in Q1 2026, while the proportion of firms reporting an increase in employment
rose modestly from 5.1% in the previous quarter to 8.5% in Q1 2026. The cautious employment stance is reflective of the broader economic environment, which remains feeble and subject to demand-side weakness and supplyside pressures.
Looking ahead, expectations remain pessimistic. A fifth (21.0%) of small businesses anticipate reducing their workforce in Q2 2026, compared to 8.3% expecting to expand it, for a net value of -12.7%, reflecting ongoing uncertainty and cost pressures. Global factors continue to weigh on employment decisions, with firms likely to prioritise cost control over expansion, delaying hiring or reducing staff levels.
Figure 10: 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
Growth expectations show some positive signs
There are tentative signs of improvement in growth expectations among small businesses, though these remain fragile. The share of firms planning to downsize, close or transfer ownership over the next 12 months declined slightly from a peak of 34.6% in Q4 2025 to 30.1% in Q1 2026. While this suggests a modest easing in pessimism, the proportion remains elevated, indicating that a significant number of businesses still face challenging conditions.
Overall, growth expectations are likely to remain subdued looking ahead, due to the uncertain demand conditions brought about by the conflict in the Middle East.
Figure 11: Growth aspirations for next twelve months
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Businesses’ main concerns surround the domestic economy
As in previous months, the domestic economy was the most frequently cited barrier to growth expansion in Q1 2026, though the citation rate fell by 5.0 percentage points to 64.6% from Q4 2025’s 69.6%. Despite this reduction, domestic economic conditions continue to be a significant concern for businesses, reflecting weakening expectations about the overall outlook.
This softening in sentiment is consistent with expectations that economic growth in 2026 will be slower than in the previous year, amid emerging headwinds linked to the ongoing Middle East conflict along with a landscape of domestic tax rises, including business rates and dividend tax. Key amongst these headwinds is inflation, which will accelerate sharply given recent energy market volatility and disruption due to supply chain blockages and delays.
Concerns related to geopolitical tensions are further evident in perceptions of the foreign economy, which recorded one of the largest increases in citation rate, rising by 6.9 percentage points to 13.4%, compared with 6.5% in Q4 2025. This is indicative of businesses expecting foreign economic conditions to contribute to higher operating costs, particularly for utilities, inputs, and fuel. Correspondingly, concerns about fuel costs increased sharply from 6.0% to 14.8%, highlighting the mounting pressure of energy-related expenses.
Figure 12: Potential barriers to achieving growth aspirations*
* Respondents could select multiple answers
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Credit
Small businesses face tightened credit conditions
Figure 13: Credit applications and interest rates offered
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey Have
The Bank of England base rate remained unchanged at 3.75% across Q1. Against this backdrop, there was a slight decline in the proportion of businesses that applied for credit over the past three months, easing from 15.7% in Q4 2025 to 15.5% in Q1 2026.
While the policy rate remained stable, credit conditions appear to have tightened, as small businesses reported a higher share of credit applications being unsuccessful and higher average interest rates. The share of firms that were successful in securing credit fell sharply, from 66.0% in Q4 2025 to 58.1% in Q1 2026. This reflects the poor correlation between the Bank of England base rate and general access to credit that we see in the SBI. This on the surface implies that alternative factors are determining the cost of interest that small businesses pay.
Besides credit availability, borrowing costs also edged higher, with the proportion of businesses being offered interest rates of 8% or above rising from 51.2% in Q4 2025 to 59.5% in Q1 2026. The SBI also shows 33.7% of those offered credit citing an interest rate of 11% or more. This is the third highest ever recording for this category. Incentives for capital investment, such as enhanced reliefs for plant and machinery, which are designed to offset higher financing costs and encourage businesses to bring forward investment decisions, are likely to provide some support at the margin.
Figure 14: Proportion of small businesses successful in their credit applications in the past three months
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Net credit perceptions in Q1 2026 remain stable, though outlook continues to be weak
Overall net perceptions of the credit environment deteriorated slightly, from -31.0 in the previous quarter to -33.8 this quarter. While this represents only a modest decline, it reinforces the view that sentiment towards credit conditions remains firmly negative. Only 12.6% of businesses rated the credit environment as “quite good” or “very good”, while 46.4% described it as “poor” or “very poor”.
This persistent pessimism suggests that firms continue to face difficulties not only in accessing finance but also in securing credit on affordable terms. The limited improvement in sentiment in Q4, despite a reduction in the policy rate, indicates that lower headline interest rates have yet to translate into materially easier lending conditions.
Looking ahead, sentiment towards the credit environment is likely to remain subdued over the coming quarters, particularly with the scaling-back of previously-held expectations of a gradual easing in interest rates. Renewed inflationary pressures have pushed out the anticipated timeline for further monetary loosening, weakening confidence that borrowing costs will fall meaningfully in the near term. As a result, financial conditions are increasingly expected to remain tighter for longer.
Figure 15: Index of credit perceptions over time, a weighted net balance of those with negative responses subtracted from those with positive responses
Source: FSB - Verve ‘Voice of Small Business’ Panel Survey
Ongoing economic headwinds weigh on business investment plans
The net balance of small businesses planning to increase capital investment in the coming quarter, at -19.0% in Q1 2026, marked a slight improvement from -23.8% in Q4 2025. However, it remained negative, likely due to continued weakness in investment momentum and an accumulation of domestic and global headwinds. On the demand side, weaker household real incomes and a loosening labour market have constrained consumer spending, limiting revenue expectations for many small businesses. Against this backdrop, firms’ appetite for risk has therefore remained low. The recent increase in dividend tax has likely also decreased the opportunity to invest for many microbusinesses which rely on dividends for a large proportion of their basic income. Decreases in the rate of Business Asset Disposal Relief may also play a role in reducing the incentives for business owners to invest in their business.
The regional data highlight pronounced disparities in investment intentions across the UK. At -31.0% and -29.2% in Q1 2026, respectively, the East Midlands and North West recorded some of the weakest net balances.
These are likely to be a result of structural regional disadvantages, such as the East Midlands’ high reliance on manufacturing, as well as an overall underinvestment in the North of England.
In contrast, London saw a net balance of -10.0% in Q1 2026. While London’s investment sentiment remained negative, it was still the strongest among the UK regions.
Figure 16: % 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
Economist’s View
This edition of the FSB Small Business Index provides further evidence of the economy’s relative malaise. The indicator has remained in negative territory in each quarter of the last two years. Stretching back further, only one positive reading has been recorded in the last four years.
Yet there was an improvement relative to Q4, or at least signs of pessimism being less widespread. The quarterly increase in the indicator was the strongest in a year, while the forward-looking indicators were less negative across the board.
This development aligned with other economic indicators, which pointed to some green shoots. At the turn of the year, policy uncertainty had somewhat dissipated following the November Budget. Meanwhile, inflation was slowing and looked to be within touching distance of the 2% target, opening the door for more interest rate cuts. Other economic sentiment trackers showed largely positive readings, including Cebr’s Consumer Confidence Index with YouGov, and the Purchasing Managers’ Indices.
However, the landscape has shifted markedly since the recent escalation of conflict in the Middle East. This represents the latest in a long line of major shocks rocking the UK, and indeed the global, economy.
The primary impact will be felt through inflation. The conflict has already caused significant volatility in energy markets, with prices surging due to supply chain disruption and constrained capacity. This is already feeding into input prices, notably for fuels.
A portion of these rising costs will be absorbed by businesses, constraining margins. Another portion will be passed on to end consumers, stoking inflationary pressures, adversely impacting consumer spending power, and necessitating more restrictive monetary policy. Collectively, these channels will contribute to slower growth this year. Cebr’s UK growth forecast for 2026 has already been cut sharply, to 0.8%, from 1.1% very recently.
Signs of the impact on small businesses are already clear in this report. The share of businesses citing fuel and inputs as amongst the main sources of cost changes climbed to 38.3% and 40.0% respectively in Q1. Both readings represented the highest shares since 2023, when the economy was still suffering from the aftereffects of Russia’s invasion of Ukraine in the year prior. The share citing fuel costs as a potential barrier to growth also reached its highest rate since that period, at 14.8%.
At time of writing, the situation is extremely uncertain, with developments that have a potentially significant bearing on the economic outlook taking place almost on a weekly basis. In any case, the economic scars of recent weeks will last, and could deepen further should hostilities continue. The UK’s small businesses, and other stakeholders in the economy, will not be exempt from the effects, presenting a clear downside risk to future values of the Small Business Index.
Sam Miley, Head of Forecasting and Thought Leadership, Cebr
Appendix
Summary data table
– previous three months
– coming three months
Credit availability and affordability – rated ‘poor’ or ‘very poor’
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 from this quarter’s SBI survey are weighted by regional small business population, using the BPE stats for 2025 published by DBT. Previous SBI surveys are weighted by regional gross value added. The difference made by this change in weighting going forward is expected to be minimal, but will allow more frequent updating of the weighting profile.
The survey was in the field from 10-24 March 2026 and received 958 responses.
© Federation of Small Businesses 2026
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