Confidence among small businesses rose to its highest level in three years, according to the latest research.

The Federation of Small Businesses Business Index reached 15.9 points in the second quarter, 9.6 points higher than at the start of 2013 and the second highest reading since the Index began in 2010.

Financial services firms report the highest confidence levels, possibly reflecting the recent peak of the FTSE 100. And despite recent output contractions in the manufacturing sector, small manufacturers are more optimistic about their prospects, suggesting that conditions in the sector are improving.

With house prices rising steadily in 2013, the report also shows that estate agency confidence levels are improving. A larger number of firms expect to increase staffing levels in the coming three months. Retail businesses remain least confident.

The Chancellor is delivering his Spending Review next week (26) and the FSB is urging him to build on these positive figures with initiatives for growth to keep confidence levels high.

Following another quarter’s results which show four in 10 firms that applied for finance were refused, the FSB wants to see the Chancellor set a clear plan for the Business Bank to improve competition in the banking sector and to help advise small firms on alternative finance providers. However, the report shows that while Funding for Lending isn’t getting finance to more businesses, the rates offered are becoming lower.

Roger House FSB Chairman for Kent and Medway, said: “After five consecutive quarters of year-on-year growth, confidence is moving in the right direction. Small firms want to employ more people and grow their business. They want to export and expect turnover levels to increase. This is all good news, but we must not be complacent. The Chancellor must use the Spending Review to build on this optimism. While there are positive signs, inflation and not being able to access finance will affect how quickly, and how much, small firms can grow and create jobs.

“We know inflation is likely to remain high for the coming 12 months, largely due to rising energy costs. This is why reform of the sector is so important and why it must provide transparency for small firms to choose the best tariff for them.”