FSB Voice of Small Business Index Quarter 2 - 2026

FSB Voice of Small Business Index

Quarter 2, 2026

SBI Q2 2026 “Lowest ever growth aspirations figure shows scale of challenge facing new Government”

32%

of small businesses expect to contract (i .e . shrink, sell up, or close) over the next 12 months, while only one in six (18%) expect to grow

55%

of small businesses saw their revenues decrease over the second quarter, while only around a fifth (22%) saw them increase 19% of

FSB Foreword

The latest iteration of FSB’s Small Business Index, covering the second quarter of 2026, underlines the scale of the challenge currently facing small firms, and the need for intervention from the new Government to get growth back on the menu for small businesses and self-employed people. As Andy Burnham and his team of new ministers pick up the reins, getting growth restarted among the small business and self-employed community should be top of their to-do lists, to support recovery in the wider economy, and jobs and prosperity in every postcode in the UK.

Just over one in six small businesses (17.8%) anticipate growth over the next 12 months, the lowest ever result on this question, while nearly one in three (31.6%) expect to shrink, sell up, or close entirely over the next year.

From revenue performance to employment intentions, from business investment to cost pressures, the overall picture in the second quarter of 2026 is not an optimistic one.

Just one in five small firms (21.7%) reported an increase in revenues over the past three months, significantly outnumbered by the over half of small firms who reported a fall in revenues (55.3%).

Looking to the coming quarter, under a quarter of small firms (23.3%) predicted that their revenues will rise, while over twice as many (48.2%) believe they will fall, a downgrade from Q1’s equivalent figures of 25.3 per cent and 45.5 per cent.

Small and medium-sized businesses account for threefifths of the private sector employment in the UK, so the employment intentions data in this report ought to be of great concern to the new Government. Only around one in 14 small businesses (7.4%) says they plan to expand their staffing numbers in the coming quarter, while around one in five (19.2%) expect their staff numbers to decrease. The last time that the hiring intentions net balance was in positive territory was two years ago, in the second quarter of 2024.

The low level of business investment intentions is another warning sign, with over twice as many small firms saying they plan to decrease capital investment over the next quarter (33.6%) as saying they plan to increase it (15.6%).

Cost pressures increased in the second quarter, with the proportion of small businesses reporting higher running costs when compared with the same period last year rising from 86.7 per cent in Q1 to 89.1 per cent in Q2. Three in ten small firms (30.3%) reported that their costs had risen by more than 10 per cent, up from over a quarter (26.1%) in Q1.

Tina McKenzie, Policy Chair, Federation of Small Businesses

Taxation was the most-cited driver of cost changes, at 58.5 per cent, followed by fuel at 54.6 per cent, utilities at 53.7 per cent, and labour at 53.2 per cent. We continue to see worrying rises in wholesale prices for gas and electricity in light of events in the Middle East. It is encouraging that this pressure on energy bills has been recognised by the new Government in respect of households, with the removal of VAT from household energy bills; now small businesses need assistance too.

The new Government has expanded the former Department of Business and Trade to become the Department for Business, Innovation, Science and Trade, indicating that it grasps both the seriousness and the size of the business growth challenge.

The new Prime Minister’s clear intention to reform the business rate system is a promising sign; small firms have been waiting for positive movement on rates for some years now, and want to see change as soon as possible. The recent announcement of relief for pubs and live music venues is a good start, but must be a downpayment on action that reaches across the entire small business community.

The new Prime Minister’s first Budget will be a huge early test of whether he can put small businesses first, drive down costs, and drive up growth, opportunity and jobs –but what is crucial is that this is complemented by every department finally putting growth first and pulling in the same direction. The early engagement that the new team at the Treasury has had with FSB is an optimistic sign on this front, as the Autumn Budget, and the run-up to it, will be when small businesses make their judgement, which will have a big impact on their confidence and therefore on investment, growth, and the creation of jobs and start-ups.

Late payments are a perennial thorn in the side of small firms’ cashflow, and we welcome indications that the manifesto commitment to tackle them is being taken forward at full speed. The new Commercial Payments Bill must be prioritised and given a day-one commitment to bring its vital measures into force as soon as possible.

Small businesses are by their very nature optimists. We can all hope that a new Government with refreshed ministers will start to turn things around, replacing a ‘Whitehall knows best’ culture with one where the people delivering growth on the ground are listened to, and given the conditions they need to succeed.

Small Business Index

Small Business Index resumes its decline, following a brief uptick in Q1 2026

The Small Business Index (SBI) fell to -57.4 in Q2 2026, down from -52.5 in Q1 2026, remaining firmly in negative territory. This is also well below the value recorded a year ago of -44.1.

The persistence of pessimism among small businesses reflects continuing concerns around weak domestic economic conditions. Other SBI indicators share these muted growth prospects. A net balance of 24.8% of firms expect their sales revenue to decline in the next three months as market demand is expected to soften further. Rising input costs have led some companies to trim their headcounts, with 21.6% of small businesses saying they reduced their workforce size in Q2 2026.

Looking ahead, the outlook for the remainder of 2026 remains fragile. Uncertainty driven by the conflict in the Middle East is expected to weigh on business sentiment, as the risk of further input price volatility from reescalation remains pertinent. Many firms may adopt cautious behaviours such as scaling back or delaying capital investment, while they continue to assess the potential effects on wider economic performance.

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

All regions report negative business sentiment, with wide disparities present

In Q2 2026, small business sentiment remained firmly negative across all UK regions, as domestic and global economic headwinds persisted. The sustained downturn in 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 considerable regional variation. London saw a sharp deterioration in perceived business prospects, falling from -31.3 to -76.8, meaning it recorded the weakest sentiment in Q2 2026. Some regions, however, did see improvements to next quarter’s outlook. Scotland led the

way in terms of positivity, rising 31.5 points to -32.1, with the West Midlands next, gaining 20.5 points to reach -51.1

There is little evidence of a clear geographical or urbanrural pattern in regional sentiment this quarter. The previous quarter’s readings may have been atypical for some regions in themselves. Generally, the most resilient regions tend to have lower exposure to cyclical sectors like financial and professional services, which are more sensitive to demand fluctuations, and have benefited from a more diversified sectoral mix. Overall, local economic conditions appear to have been more important in explaining differences in sentiment.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey

2 Sample size for Northern Ireland and Wales is insufficient for accurate reporting. The North East is combined with Yorkshire and the Humber due to low sample sizes for the former region.

Sector Small Business Index

Pessimistic business outlook increasingly entrenched in all

sectors

Business sentiment was firmly negative in all major industries in Q2 2026. Furthermore, perceptions of business prospects deteriorated in all but two sectors, as the inflationary effects of the Iran conflict increasingly filter through to the wider economy.

The accommodation and food services sector reported the weakest outlook in Q2 2026, of -93.7 – a quarteron-quarter drop of 31.1 points. Hospitality businesses have one of the highest shares of minimum wage workers and thus are most exposed to April’s 4.1% hike to the National Living Wage. Furthermore, persistently elevated wholesale food and energy costs are squeezing profit margins of firms in the sector as revenue growth also slows due to constrained discretionary spending.

In contrast, construction experienced an improvement in sentiment, with its index increasing 12.2 points to -64.6. This mirrors the expansion in construction activity recorded in the rolling three months to March and April, with construction output growing 0.4% and 1.6%, respectively. However, building activity continues to be dampened by geopolitical uncertainty, with many capital investments and project plans delayed until the impacts of the conflict in the Middle East become clearer. Therefore, sentiment remains fragile, despite the slight recovery in Q2 2026.

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 growth less prevalent as firms face weak consumer demand

Small business revenue performance worsened in Q2 2026. The net balance of firms reporting revenue growth decreased to -33.6%, close to the all-time low of -34.9% recorded in Q4 2025.

Looking ahead, the net balance of small businesses expecting revenue growth over the next three months stands at -24.8%, representing a 4.6 percentage point decrease compared to expectations last quarter. This suggests that firms anticipate suppressed consumer spending to persist in the coming months.

Another indicator – the Cebr/YouGov Consumer Confidence Index3, showed perceptions of household finances in the next 12 months picked up in June. This slight uptick in optimism could reduce the need for households to restrain discretionary spending, as they anticipate a relative improvement to purchasing power. However, sentiment remains firmly in negative territory. Moreover, consumers’ perspectives on job prospects in the next 12 months deteriorated. A higher perceived risk of unemployment could induce greater precautionary saving, and further decrease demand.

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

Small businesses report continued contraction in export values

In Q2 2026, export performance among small businesses remained firmly negative, but recovered slightly relative to last quarter. The net balance of firms reporting growth in export values rose to -23.4%, representing a gain of 8.1 percentage points compared with Q1 2026.

Furthermore, a greater proportion of small businesses reported rising export revenues. Around a fifth (19.2%) of firms reported an increase in export values in the last quarter - up slightly on the 15.1% recorded in Q1 2026. Overall, small exporters in the UK still face a tough business environment, with stubbornly high energy and input costs hitting international competitiveness. In the longer term, flatlining productivity in the UK may offer

a key explanation as to why export values, on net, have been reported as declining consecutively since Q2 2019. The minor improvement in sentiment this quarter will likely be short-lived. The net balance of firms expecting growth in export values in the coming quarter declined from -15.2% in Q1 to -22.8% in Q2, suggesting that firms are becoming increasingly pessimistic about future export revenues. Looking ahead, any renewal of optimism in export activity will depend largely on geopolitical conditions, particularly relating to the conflict in the Middle East, which has severely disrupted supply chains since it began in February.

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

Fuel costs emerge as second largest contributor to increasing operational costs, behind taxation

Taxation was once again the most listed cause for changing business costs, with 58.5% of firms citing it in Q2 2026. A large increase in the tax burden in April 2025, primarily driven by the hike of employers’ National Insurance Contributions, was followed in April 2026 by a cut to the main rate of Writing Down Allowance (WDA) for plant and machinery to 14%. In Q2 2026, 54.6% of small businesses reported fuel as a significant determinant of rising costs – this was the second highest proportion, surging 16.4 percentage points from Q1 2026. Fuel price volatility, following the closure of the Strait of Hormuz, made fuel one of the first channels through which the inflationary effects of the Middle East conflict were transmitted.

A net balance of 85.4% of small businesses reported increases in operating costs in Q2 2026. Labour costs, which have had a large influence on overall operational costs in recent months, have become a slightly less prominent concern in the latest quarter, with 53.2% of firms listing them as a cause, down from 55.9% in Q1. Although the National Living Wage was uprated in April, cooling labour market conditions may offset the impact on firms’ labour costs. Slowing earnings growth and weaker worker bargaining power are likely to have reduced upward pressure on wages, helping to mitigate overall labour cost pressures.

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 subdued despite recent recovery

Despite consecutive quarter-on-quarter improvements, the employment outlook among small businesses continues to be pessimistic. The net balance of firms reporting expansions of their workforce rose from -14.2% to -13.3% in Q1 2026. While this indicates some minor improvement in labour market conditions, the balance remains firmly negative, signalling that more firms are reducing headcounts than expanding them.

Overall, businesses did not report large-scale changes to their workforce. Only a small fraction of firms reported increasing or decreasing their headcounts by ‘a lot’ in Q2 2026, with 62.4% of firms saying they maintained the

size of their workforce. Although most firms have not participated in substantial layoffs of workers, employment sentiment remains negative, and increasing inflationary pressures have led small businesses to prioritise cost control and delay hiring decisions.

Looking forward, this cautious employment stance is anticipated to continue as economic uncertainty makes future demand more difficult to forecast. For instance, 66.3% of small businesses plan to maintain existing employment levels over the next three months, with just 7.4% expecting to expand their headcounts.

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

Employment change, last three months Expected employment change, next three months

Growth Aspirations and Challenges

Growth expectations inhibited by ongoing economic uncertainty

The proportion of businesses expecting growth in the next 12 months has hit a record low of 17.8%, following a 3.9 percentage point drop in Q2 2026. The conflict in the Middle East, and its associated oil price shock, has increased the risks associated with investment and expansion, leading firms to scale back their growth ambitions.

Overall, growth expectations are likely to remain subdued looking ahead, due to the uncertain operating conditions created by the conflict in the Middle East. There is scope for a recovery in aspirations in the medium term, if stability returns and supply chains remain undisrupted.

Figure 11: Growth aspirations for next twelve months Source: FSB - Verve ‘Voice of Small Business’ Panel Survey

Demand-side weakness a growing constraint on expansion potential

As in previous quarters, the domestic economy was the most frequently-cited barrier to growth expansion in Q2 2026, with a citation rate of 63.5%, though the citation rate fell by 1.1 percentage points compared to Q1. Despite this reduction, domestic economic conditions continue to be a significant concern for businesses, with elevated cost-push inflation risk reducing the scope for interest rate cuts, and economic growth forecasted to be modest.

Firms’ growth aspirations are increasingly being restricted by tepid consumer demand, as slowing earnings growth weighs on households’ real purchasing power. The proportion of firms listing consumer demand as a barrier to reaching growth targets rose sharply, from 25.5% in Q1

2026 to 29.6% in Q2 2026. Despite this increase, the tax burden and labour costs remain more prominent limiting factors for firms’ expansion.

However, barriers to growth are not solely rooted from domestic issues. The outbreak of war in Iran has put intense upward pressure on vehicle fuel prices, which rose by 24.6% year-on-year in May. Over a sixth of small businesses (18.2%) reported fuel costs preventing them from achieving growth ambitions. Fuel is a key input to production and distribution activities, so the recent acceleration in fuel inflation has resulted in a spike in operating costs for firms.

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 Q2. Against this backdrop, there was a further decline in the proportion of businesses that applied for credit over the past three months, falling from 15.5% in Q1 2026 to 14.7% in Q2 2026. Higher input costs are likely to have incentivised more cautious borrowing behaviour, as firms sought to limit their exposure to interest expenses.

Credit conditions remain tight despite the proportion of unsuccessful credit applications falling to 27.4%, as lenders continue to face a relatively high policy rate. There are measures in place to ensure greater credit accessibility for small businesses. For example, the Growth Guarantee Scheme has been extended through to 2030 and supports a wide array of products including term loans,

overdrafts, and asset finance. While this support alone will not eliminate credit market tightness, it will continue to enable some growth opportunities via debt financing for smaller enterprises.

Looking ahead, the resumption of hostilities between the US and Iran could destabilise energy markets once again, as energy supply is disrupted, increasing the risk of persistent inflationary pressures, and potentially reducing the scope for interest rate cuts heading into 2027. Higher borrowing costs would limit access to finance and could depress lending activity. This adds to existing challenges, including subdued consumer demand and weak revenue expectations, which may increase lenders’ perception of risk and further tighten credit conditions.

Figure 14: Proportion of small businesses successful in their credit applications in the past three months4

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey

Net credit perceptions are stabilising,

but at a low level

Overall net perceptions of the credit environment worsened, from -33.8 in Q1 2026 to -37.5 in Q2 2026. This marked the third consecutive decline in the Credit Index, after an uptick in Q4 2025. Just 14.9% of businesses rated the credit environment as “quite good” or “very good”, while 52.4% described it as “quite 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 fact that negative perceptions of credit outweighed positive ones by more than three to one, despite UK GDP growth showing resilience in Q1 2026, demonstrates that small businesses did not feel the benefits of that wider economic growth.

Looking ahead, sentiment towards the credit environment is likely to remain negative over the coming quarters, particularly if renewed inflationary pressures delay the onset of monetary policy easing. Elevated interest rates will reduce the affordability of credit for small businesses and restrict expansion opportunities.

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

Investment

Majority of businesses still anticipate no change to their capital investment

The net balance of small businesses planning to keep capital investment approximately the same in the coming quarter rose to 50.9% in Q2 2026, up 3.0 percentage points on the previous quarter. Uncertainty stemming from supply-side disruptions in the Middle East is likely to encourage firms to delay investment decisions, as its impacts on costs and revenues of potential projects will be difficult to predict.

While all regions returned net negative net balances for investment intentions, regional data highlights nonetheless pronounced disparities in investment intentions across the UK. At -39.7% and -34.9% in Q2 2026, respectively, the West Midlands and North West recorded some of the weakest net balances. The sectoral

mix of firms in those regions could be structural drivers of weak performance. For instance, the West Midlands is highly exposed to automotive supply chains and advanced manufacturing, making it disproportionately sensitive to international trade conditions.

In contrast, the East of England saw a net balance of -6.5% in Q2 2026. A large proportion of firms in the region operate in the technology and life sciences sectors, where investment decisions are driven primarily by longterm growth prospects and R&D needs, rather than shortterm fluctuations in consumer demand. Thus, investment sentiment in the East may continue to display relative strength during this period of economic uncertainty.

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

The latest edition of the FSB Small Business Index further illustrates the scale of economic headwinds faced by small businesses. The last time the indicator was in positive territory was a brief uptick in Q1 2024, though this has since been followed by a persistent decline in sentiment.

While the index has recovered slightly from its lowest post-pandemic value, in Q4 2025, it remains below levels seen a year ago and firmly in negative territory. Despite modest improvements to export and employment perceptions, confidence in most categories saw further deterioration, with growth aspirations the hardest hit.

Prior to the start of the conflict in the Middle East, general economic expectations in the UK had demonstrated signs of recovery. Consumer confidence was strengthening, while business confidence had also started to recover, as easing inflationary pressures in the second half of 2025 raised expectations of interest rate cuts.

Prospects for small business confidence have been weakened substantially, however, primarily due to the escalation of conflict in the Middle East. This development adds to a succession of significant geopolitical and economic shocks that have weighed on both the UK and global economy.

The primary impact has been, and will be, felt through inflation. Since the escalation of conflict in February, energy supply has been severely disrupted by the closure of the Strait of Hormuz, leading to a surge in energy commodity prices. Further pass-through to consumer prices is expected, as small businesses, often operating on tight profit margins, are increasingly forced to pass on higher energy and fuel costs to their customers.

Consumers are expected to absorb the largest proportion of the inflationary shock in the form of reduced real purchasing power. Weak labour demand and low vacancy rates have also diminished bargaining power, constraining workers’ ability to demand higher nominal pay. Though beneficial in terms of minimising second-order impacts to inflation, it does imply further constraints on households’ discretionary spending. Consequently, small businesses will likely face weaker demand and lower revenues, putting further pressure on profit margins.

Direct impacts to small businesses are also evident in this report. The share of businesses citing fuel and inputs as amongst the main sources of cost increases saw the largest quarter-on-quarter changes, jumping to 54.6% and 43.7% respectively in Q2. The fuel reading represented the highest share since Q3 2022, when the economy was enduring the effects of the last large supply-side shock, brought about by Russia’s invasion of Ukraine.

At the time of writing, the US-Iran memorandum of understanding is in jeopardy as both countries resume hostilities. Further reescalation jeopardises the security of traffic through the Strait of Hormuz, restricting oil supply. Accordingly, the heightened risk of another surge in wholesale energy prices could intensify inflationary pressures in the UK, potentially delaying the Bank of England’s monetary easing cycle.

Pushpin Singh, Managing Economist, Forecasting and Thought Leadership

Appendix

Summary data table

– previous three months

– previous three months

Exports – coming three months

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 are also weighted by region according to 2025 Business Population Estimate (BPE) stats published by the Department for Business and Trade.

The survey was in the field from 9-23 June 2026 and received 1,113 responses.

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