As a small business owner in the UK, you are likely coming to terms with yet another increase in the cost of borrowing following the Bank of England's decision last week to raise the base rate to 4.0%, the highest it has been since 2008.
According to UHY Hacker Young, the average rate on new bank loans written has increased fivefold, from 0.98% in May 2020 to 5.84% in December 2022. This increase in interest rates is putting pressure on small businesses, which often operate on tight margins, and where even a slight increase in borrowing costs can have a significant impact.
And it's not just you.
When added to rising inflation, skills shortages and supply chain challenges, the higher cost of servicing debt is making it difficult for many small businesses to pull themselves out of the COVID slow-down and return to growth. This is creating a negative impact on the economy as a whole.
In fairness, the risk is widely recognised, and the Bank of England's Chief Economist, Huw Pill, indicated at the weekend that this sustained period of rate rises could be nearing an end.
If it is, then great 😀.
The true cost of borrowing
The base rate is, of course, only one component of the interest rate that you pay to borrow money. Added to the base rate is the lender's margin, which is influenced by its assessment of the risk, the cost of capital and its profit ambitions.
Many small businesses, due to the lack of collateral, have to pay even higher interest rates because their options are limited.
Out in the real world, we are seeing a mixed picture with rates available. This indicates that market rates could be close to peaking, even if the base rate itself edges higher next month, as some predict it will.
Some lenders are capitalising on rising rates and continuing to push their own margins higher, whereas others are realising that they might have already gone too far and are reducing rates to stimulate more demand. This often comes in the form of exclusive deals to brokers like ourselves.
Reflect and review
A situation where supply could be outstripping demand makes it a good time to review your sources of funding.
If you can't reduce debt, refinancing existing debt and negotiating better terms with lenders can reduce exposure to higher interest rates and build in protection from prevailing economic uncertainty.
A note, too, if you are considering raising new finance. Now might not seem like the best time to borrow new money if interest rates are thought to be peaking.
The reality is, though, that interest rates are unlikely to come down materially, if at all, in the foreseeable future. In our view, the days of a base rate below 1% are gone, and 3.5% - 4.5% is likely to be the new normal. Any long-term forecast on the cost of money is already priced into the markets and the rates lenders charge for fixed rate deals.
If you need new cash to finance growth or recovery, there is little benefit in delaying. Lenders want to lend and, in the context of the new normal for interest rates, there are competitive deals available if you know where to look.
Fortunately, we do!
We will be pleased to complete a refinancing review or an assessment of your new borrowing requirements, free of charge. Please get in touch to find out more.