The next 12 months could see a significant contraction within the small business and self-employed community, according to sobering new research by the Federation of Small Businesses (FSB).
In the second quarter of this year, the proportion of small firms who expect to grow over the next year reached its lowest ever point in the history of FSB’s Small Business Index, going back to the end of 2014. Just over one in six (18%) anticipate growth, but they are comprehensively outweighed by the nearly one in three small businesses (32%) who expect to shrink, sell up, or close entirely over the next year.
The gap between firms that predict growth over the next year and those who predict shrinkage, a sale, or closure is at its widest ever extent, with a net balance of -14 per cent, narrowly beating the -13 per cent from Q4 2025. The net balance turned negative for the first time this time last year, but has stayed firmly below zero ever since.
Small businesses pointed to the domestic economy (64%), the tax burden (40%), and labour costs (33%) as the leading factors which they believed would act as a brake on their growth over the next year.
Revenues slow down in second quarter
Revenue performance among small businesses was very subdued in the second quarter, with just one in five small firms (22%) reporting an increase in takings over the past three months. They were significantly outnumbered by the over half of small firms who reported a fall in revenues (55%).
Looking to the coming quarter is a similarly gloomy picture, with under a quarter of small firms (23%) predicting that their revenues will rise, while over twice as many (48%) believe they will fall, a downgrade from Q1’s equivalent figures of 25 per cent and 45 per cent.
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 87 per cent in Q1 to 89 per cent in Q2. Three in ten small firms (30%) reported that their costs had risen by more than 10 per cent, up from over a quarter (26%) in Q1.
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.
Tina McKenzie, FSB’s Policy Chair, commented:
“With a new UK Government imminent, we need to see new drive, ambition and focus to get the ‘growth, growth, growth’ promised at the election.
“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. Small firms are the only engine of growth present in each and every postcode and we need them firing on all cylinders.
“The unforced errors on business rates made at the last Budget clearly need to be revisited and reworked – and we strongly welcome Andy Burnham’s promising comments in this regard. 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.
“Part of that is delivering on important manifesto commitments – especially on late payments – where progress has been present but pedestrian. The new Commercial Payments Bill must be prioritised and given a day-one commitment to bring these vital measures into force as soon as possible.
“But equally, this will be about recognising that those running small businesses are people too, and suffer just as much as everyone else when a ‘Whitehall knows best’ culture fails to listen to the people delivering growth on the ground.
“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.”
John Hurst, FSB Wales Chair, said:
“These figures underline the scale of the pressure facing small businesses across Wales. Firms cannot keep absorbing rising costs indefinitely, and that pressure is clearly weighing on confidence.
“If we want local businesses to invest, hire and grow, the new Welsh Government needs to act on the cost pressures it can influence. That should start with business rates, opening up public procurement to smaller firms, and ensuring the new development agency provides practical, accessible support to small business owners in every part of Wales.
“Small businesses are central to the Welsh economy, but they need government to match warm words with delivery.”
