Rising interest rates and high costs have forced many businesses to cut spending, freeze pay increases and restructure operations as they grapple with cost pressures, new research shows.

The survey of 605 UK mid-sized businesses finds that 52% have already frozen salary increases, with a further 36% planning to do so. Almost half (48%) have also frozen workforce bonuses, according to new research from Grant Thornton UK LLP’s Business Outlook Tracker.

Spending on people costs has been curbed across most areas, with 45% also having cut staff numbers, with many businesses freezing recruitment (46%).

Almost all interviewees (91%) said they have either already restructured their operations or plan to do so. Companies are keeping a close eye on their financial position, as almost half (47%) have reviewed their discretionary spending and a further 42% plan to do so. 

Businesses are looking for solutions in a bid to improve performance amid a tightening of spending. More than half have invested in productivity, efficiency and automation and a further 40% have plans to explore options in this area.

Chris Petts, Partner, restructuring and debt advisory, Grant Thornton UK LLP, said: “While inflation is, slowly, starting to fall, it’s clear that firms are remaining prudent and closely monitoring their spend across all areas from wages to recruitment and operations.”

Petts said, however, that companies in the mid-market are increasingly optimistic about future revenue growth expectations, suggesting that many are “confident that the actions they’re taking now, or have planned, are sufficient to work through this period”.

The latest official data has shown a slight real wage increase for the first time in more than a year, coupled with a fall in energy costs and usage over the summer, which could mean consumers will soon have more disposable income to spend.

Simon Gray, Head of Business, ICAEW, said: “The survey findings echo sentiment we hear through ICAEW member networks. Businesses have faced a squeeze on margins due to rising input costs, including pay awards, alongside difficulty in passing on price increases. Costs have come sharply into focus as businesses continue to grapple with a challenging economic environment. There are signs that recruitment activity has cooled and companies that will have already awarded pay increases in response to the cost-of-living crisis may find continued awards unsustainable.” 

Challenging borrowing

Almost three quarters (74%) of the businesses surveyed anticipate raising additional funds over the next year to tackle cost pressures, however. A significant majority also expect lending terms to be much tighter during the next round of fundraising. A quarter of all respondents said that accessing finance has become more challenging over the past 12 months.

Jon Bramwell, Debt Advisory Director, Grant Thornton UK LLP, said: “The combined effect of increasing borrowing costs and wider economic pressure on businesses means that the high street banks are finding it more difficult to lend to mid-sized businesses. This is particularly true for companies in sectors that are more challenged, including manufacturing, hospitality, retail, construction and real estate. This poses a challenge for businesses needing to extend their existing borrowing arrangements or raise new capital when they no longer fit what their traditional lenders are looking for.”

Bramwell said, however, that the wide range of lenders today, including challenger banks, asset-based lenders and private lenders, offer alternative options where high street banks can’t extend financing.

“This creates all-important options to access capital for mid-sized organisations and much-needed flexibility when it is most needed,” Bramwell said. 

A wide range of lenders is critical, too, as companies look to gear up again as the economy improves, hopefully in the near future.

Gray said: “Businesses have reported a ‘wait-and-see’ approach to investment driven by ongoing economic uncertainty and challenges in accessing and servicing finance, which has curbed productivity gains that could come from technology and automation.

“There is appetite for investment, but many companies appear to be holding fire until conditions improve. ICAEW’s Business Confidence Monitor (BCM) is back in positive territory with all eyes now on Q3 results. As winter approaches, businesses remain cautious about the potential for energy price rises and any further increase in interest rates.”