Rising costs were the number one concern for SMEs as they headed into 2017, according to a new survey.
The SME Confidence Tracker for the last three months of 2016 from Bibby Financial Services shows 22 per cent cited escalating overheads as their top concern.
The firm said the issue of rising costs has been climbing up the agenda for SMEs over the past 12 months, underlining the impact of inflation driven by the vote to leave the EU and depreciation of the pound.
Costs are a particular concern for manufacturers, with 29 per cent citing them as their biggest challenged.
As a result of higher costs, Bibby said investment intentions have fallen as SMEs become more cautious. For Q1 2017, businesses intend to invest an average of £49,237, less than half the intended investment for Q3 2016 (£101,919).
Over the same period, investment intentions for manufacturers have fallen by 150 per cent.
More than a quarter of SMEs (28 per cent) said they were holding off investment over concerns about the UK economy, with another 22 per cent citing concerns about the wider EU economy. Nearly one in four firms (24 per cent) said they will concentrate on building up their cash reserves.
For SMEs as a whole, increasing competition (18 per cent) and late payments (11 per cent) were also seen as key challenges for 2017.
David Postings, global chief executive of Bibby Financial Services, said: "Smaller businesses are becoming increasingly concerned about rising costs. We're seeing more SMEs looking towards efficiency, rather than investment for growth at the start of 2017.
"Rising costs fuelled by inflation and the drop in the value of the pound is a double-edged sword for many businesses. The manufacturing industry has recently grown at the fastest rate for 25 years, fuelled by an uplift in exports due to the pound's depreciation, but manufacturers that are reliant on importing goods and selling solely in the UK will see margins being significantly eroded.
"These businesses are facing the challenge of maintaining profitability while remaining price competitive. This equation is causing a headache for many businesses and we are seeing many SMEs start to tighten their belts and pull back investment."