Employment costs emerge as biggest barrier to hospitality SME growth

The UK’s small business community is beginning to show renewed confidence, but rising employment costs, economic uncertainty and cash flow pressures continue to hold back growth for the hospitality sector, according to new research from alternative finance provider Capify.

Published as Andy Burnham becomes prime minister, the latest Capify Business Confidence Report provides a snapshot of the opportunities and challenges facing hospitality SMEs.

Based on a survey of hundreds of business owners from the hospitality sector and beyond, the report highlights growing financial concerns for many.

Almost seven in 10 businesses experienced higher operating costs during the last quarter, while more than a third now find it difficult to access finance – up 

significantly on the previous survey.

A major challenge is that employment-related taxes have the biggest impact on hiring decisions, affecting 85% of SMEs, with wage inflation and employer legislation also influencing recruitment. For hospitality businesses, where labour is one of the largest operating costs, the findings highlight the challenge of balancing customer service with rising employment costs, particularly at a time when many venues are looking to grow.

Meanwhile, AI adoption remains cautious, with 60% of SMEs saying AI has had little or no positive impact on their business so far. While larger hospitality operations have begun adopting AI for areas such as marketing, bookings and customer service, the findings suggest many smaller businesses are still looking for practical applications that deliver a clear return on investment.

Another stumbling block is that cash flow remains under pressure, with more than 70% of SMEs saying delayed payments affect their business, restricting cash flow and delaying investment. While hospitality businesses are less exposed to invoice payments than some sectors, strong cash flow remains essential for managing seasonal demand, controlling costs and investing in equipment, refurbishments and growth.

Furthermore, a quarter of businesses say recruiting skilled employees is their biggest staffing challenge, underlining the continued importance of strengthening the UK’s skills pipeline. For hospitality, attracting and retaining experienced chefs, managers and front-of-house staff remains a key challenge as businesses seek to improve service while controlling employment costs.

Confidence in the UK economic outlook remains low at 22%, although this represents a 10% improvement since Q1 2026. More than four in 10 SMEs are less confident than they were a year ago, yet the proportion describing themselves as extremely confident in their own business has doubled. For hospitality operators, the findings reflect a sector where a minority have become more optimistic about future trading, while the majority remain cautious about rising costs and the wider economic outlook.

John Rozenbroek, COO at Capify, said: “The timing of this report provides an interesting snapshot of sentiment among smaller hospitality businesses and the wider SME community. While confidence is beginning to recover for some, many more struggle to protect margins, manage cash flow and secure finance.”

Beyond the recent business rates reduction for pubs, clubs and live music venues, Rozenbroek said the report identifies five more ways the incoming prime minister can help smaller businesses, including “reducing employment costs, improving workforce skills and supporting AI adoption”.