Small business owners sense the recovery is here to stay, but they’re still cautious on hiring and worried about health care costs.

Small business owners are starting 2013 with more optimism, although they still see plenty of challenges ahead, particularly around spending and hiring.

That’s according to the Wells Fargo’s first quarter small business survey, released Thursday. The bank’s quarterly report gauges optimism and attitudes on a range of indicators, from revenues to capital spending. This quarter, Wells also queried small business owners about health care.

“We saw an improvement in both present and future expectations, with more improvements on the future expectation side,” says Doug Case, small business segment manager for Wells Fargo.

The survey of 601 small business owners, conducted in the second week of January, found overall business optimism jumped 20 points from the previous quarter. When asked to describe their financial situations today, 54 percent of entrepreneurs said their situations were either good or very good, an increase of three percentage points over the previous quarter. Twenty-five percent described their situations as either somewhat or very poor, down from 28 percent in the previous quarter.

It was a dramatic turnaround from the end of last year, when the part of the index that measures business owners’ future expectations plunged to its lowest level since the start of the financial crisis.

Similarly, 57 percent of respondents said they expected their financial situations 12 months from now to be either very good or somewhat good, an increase of seven percentage points. Twenty-two percent said their financial situations would be either somewhat or very poor in the next year, a decrease of 6 percentage points.

A more mixed picture emerged regarding capital spending.

Twenty-five percent of respondents said they had increased capital spending either a little or a lot in the past year, up seven percentage points from the previous quarter, and 34 percent said they decreased it either a little or a lot, down from 40 percent in the previous quarter.

Only 22 percent said they plan to increase capital spending in the next year, nearly flat from the previous quarter. Twenty-eight percent said they plan to decrease capital spending, a decline of six percentage points.

“There is a high level of caution and a ‘wait and see’ mentality, with small business owners these days looking for more stability in the economic environment,” Case says.

That rings true for Jeff Scheininger, owner of Flexline, a manufacturer of industrial hoses, based in Linden, New Jersey. Flexline has 15 employees. Scheininger, who was not a survey respondent, said he put off purchasing a larger facility due to financing issues.

“I was actively searching for a new building, but between the recent increase in capital gains [rates], which cut into money I had to put down, along with more restrictions on the banking side about what they could loan, I have had to put that aside,” Scheininger says.

Scheininger, like many survey respondents, said he is also worried about the rising cost of health care. Fifty-four percent of survey respondents said health care costs hurt them a lot, compared with 25 percent who said lack of available credit did, and 18 percent who said federal spending cuts hurt them a lot.

When it comes to hiring, 27 percent said what hurt them the most was difficulty finding qualified employees, an increase of 6 percentage points from the previous quarter. And more business owners–40 percent vs. 36 percent in the prior quarter–said if they were given the opportunity they would hire temporary or contract employees rather than full-time workers. Twenty-two percent of respondents would hire full-time employees, compared with 26 percent in the prior quarter.

For his part, Scheininger has been looking for more than a year to add a senior level employee, but he can’t find someone qualified for a role that combines great customer skills and engineering knowledge.

“This past summer, I hired a search firm to do the work for us, and even they haven’t found anyone with the skill set to match,” Scheininger says.