Business confidence among small and mid-cap companies is improving, but access to funding is deteriorating, according to the latest quarterly sentiment index from accountant BDO and the Quoted Companies Alliance.

The research also suggests a lack of knowledge about alternative funding sources such as corporate bonds could impede growth.

Companies' optimism about their own prospects however has increased substantially, rising to 64.0 from 60.6 last quarter. Confidence in the UK economy is at its highest level since the survey began 18 months ago, but at 47.8 is still just below the 50.0 level that would indicate optimism.

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More than half (56%) of small and mid-cap com-panies expect full-time employees to rise over the next 12 months – the highest level seen on the index. Turnover expectations have also improved, with the mean expected turnover growth now at 11.2%, up from 7.9% last quarter.

Despite improving confidence, access to funding has deteriorated. Both companies and advisers reported all the main sources of funding were becoming more difficult to access. Confidence in private equity fell most sharply from the previous quarter, with companies rating the ease of raising finance through this channel at 4.2 out of 10, down from 5.0 last quarter.

Scott Knight, partner at BDO, said: "Companies have auspicious prospects but need capital to convert these into growth. A liquid capital market is a prerequisite for the small and mid-cap sector to remain as the crucial engine for UK growth."

Tim Ward, chief executive of the Quoted Companies Alliance, said: "Confidence among small and mid-cap companies is creeping up but if finance is not avail-able, then we will not see long-term growth."