AIBU to cancel 2nd interview?

[Ameliel]

It's a bit complicated, bear with me. I'm 46, professional in construction industry. I've been working as self employed since 2018, for family reasons, but I feel keenly that I'd like to get back into working with a larger organisation. I've also done some contract work for the past 8 months for a great company- they are industry leaders and i really enjoy it, but the money is not great. I'd really like to work for them long term so i applied for a permanent role with them in beginning of October, but the progress has been very slow. They say they'd love to employ me permanently but due to economic circumstances, its difficult and would i consider a fixed term contract instead, 1 year or so? With any luck, this could then be made a permanent role.

Because i didn't hear from them for so long, 2 weeks ago I also applied for few other roles with other companies through an agent, and landed an interview with a smaller company that I have actually worked with before, many years ago. I had a very nice chat with the MD and he has now invited me for 2nd interview. I know he is very likely to offer me a role... and herein lies my dilemma:
I don't really want to work for the smaller company, as nice as they are, because I have my heart set on working with the larger company that I am currently working with in contract role.
I don't want to mislead the smaller company MD, but I may need the offer from them to kick the larger company in action (to offer me the permanent or at least 1year fixed contract).
I want to cancel the 2nd interview because i hate to mislead them, but is this completely mad, I know it is risky and the agent will be very annoyed..and if I don't get the permanent role I want, I'm kind of left with nowhere to go??
Please help, what should I do? The interview is next week so I'm running out of time, I doubt I'll hear back from the larger company before that.

Go back to the larger company and be honest and say you have been head hunted by another company that you have worked with in the past and have been invited to an informal interview with the chances being pretty high that you will get the job. Ask the larger company that you would like an update on where you stand as you wouldnt like to waste either companies time. It will get them to make a decision one way or another. You dont have to be impolite about it just be honest.

Also be honest that you are going to them as they are the preferred company

Contact the larger company to find out what progress if any, has been made?

I would go to the second interview. It will give you leverage. You’re attaching too much emotions to an economic standpoint.

Thank you for your replies. I suppose I am worried about upsetting the smaller company Md, as he was my previous boss and we get on very well. He'll be asking why I applied in first place - obvs this is because I thought I wasn't getting anywhere with my preferred company. The larger company knows about the first interview and asked me to keep them updated, they offered to try to speed up the fixed term contract when I told them.. but it will still take some weeks...so either I'll cancel the 2nd interview or decline the offer (if I get it) from the smaller company. I just feel really bad for wasting their time.