With the Bank of England lowering interest rates by 0.25%, business borrowing could soon get cheaper. Fears of inflation following the government spending plans announced on 30 October have cooled predictions of another rate cut in December, but rates are still expected to fall next year. Despite the negative reaction many small businesses had to the recent budget, some may nonetheless feel boosted by the interest rate cut.
We explain four ways small businesses could benefit as the base rate falls.
1. Lower rates can encourage consumer spending
The problem
The cost of borrowing has shot up since the pandemic and businesses have suffered from customers cutting back their spending. The Bank of England responded to rising inflation by hiking the base rate 14 times from the end of 2021, before maintaining it at 5.25% from August 2024 when it was lowered to 5%. November’s rate cut, down to 4.75%, is the second cut in more than four years.
As the Consumer Price Index climbed, mortgage repayments increased and personal debt became more expensive to clear, swallowing up Britons’ disposable income. This, combined with the high cost of borrowing, pushed many small firms to their breaking point.
Brett Welch owns microbrewery Strangers Brewing in Scotland. He’s seen several other breweries go out of business, locally and nationally, over the last two years.
“The most important thing for me is: do my customers feel that they have the ability to buy,” says Welch, whose loyal customers reduced their spending on his premium beer as the cost of living rose. “The ones who were buying two cases a month are now buying one case a month [and] about 18 months ago, we saw a wave of [subscription] cancellations”.
How rate cuts will help
Lower interest rates ease the financial pressure on consumers, leaving more cash to pay for life’s luxuries and spending in general which in turn boosts small businesses. “It’d be great news if the base rate comes down and even better news if it continues to come down,” says Welch, adding: “It will really help individuals, particularly if they’ve got a mortgage, or if they’ve got their own loans.”
2. Variable-rate loans could be easier to pay off
The problem
Following the 2008-2009 financial crisis, consumers and small businesses had become used to interest rates being very low, so the raft of rate hikes post-Covid came as a nasty shock for those with a floating rate loan.
“Going from 0.5% to 5% Is a big jump,” says Mike Conroy, director of UK Finance, a body representing organisations in the financial services industry. “When you start calculating the cost of repayments, especially for quite large sums of money, it turns what was very affordable into pretty unaffordable,” he explains. “It’s naturally worrying, because you could make that commitment that’s eating up 20% or 25% of your cash flow every month.”
How rate cuts will help
A falling base rate directly reduces the interest charged on variable-rate loans. As the Bank of England lowers the base rate, borrowers’ repayments could start to become more manageable, and the change to their monthly outgoings should kick in quite quickly. “As the rate starts dropping, there will be a related fall in those monthly repayments,” says Conroy.
3. Financing could become easier to access
The problem
When interest rates are higher, it’s more difficult for small businesses to access the finances they need to grow, and smaller businesses face more challenges than larger ones.
The problem is not a shortage of available funds, but a tightening of lenders’ affordability checks. According to UK Finance, approval rates for loans and overdrafts fell in Q3 of 2023 by 9% and 12% respectively. Those numbers ticked up again in 2024, but remain below pre-Covid levels.
Conroy believes fewer approvals are a direct result of affordability checks getting stricter.
In Welch’s case, investing in energy-saving equipment is prohibitively expensive at current rates.
“There are some things that I’d like to do from an environmental perspective, like buy solar panels and … upgrade the boiler,” he said. “If I’m able to borrow at a lower rate, then that will be brilliant. At the moment, the rates are too high for me to consider that.”
How rate cuts will help
If the base rate continues its descent, small business borrowing will get easier. Even a rate cut of 0.5% “can be the difference between a loan that’s not affordable or one that is great”, says Conroy.
However, the deals on offer will vary between competing lenders, so it’s important to shop around.
4. Commercial mortgages should become more affordable
The problem
Many small businesses aspire to own their premises so they are not tied into paying rent. However, commercial mortgages typically charge much higher rates than residential ones, trapping small businesses in the rental market as they can’t afford to take on a loan.
Lucy Stean runs a dance studio in Hertfordshire, paying almost £3,000 a month for her high street premises.
“There is a lack of knowledge around business interest [rates]. I was very lucky that I had time to do the research,” says Stean, who was shocked by the cost when she looked into buying the space she currently leases. Having spoken to a mortgage adviser, Stean hopes that, at the end of her lease, lower interest rates will enable her to take out a commercial mortgage that is cheaper than her rent.
Welch found a different way to avoid a costly commercial mortgage: He sold shares of his business to generate the capital needed to purchase the farm building he has been using for brewing.
“In an ideal world, I would have wanted to keep the equity in the business and borrow to be able to [buy the building], but that just wasn’t going to be viable for us with interest rates as they were,” he said.
How rate cuts will help
Conroy is confident that commercial mortgages should get cheaper, though he warns that the days of ultra-low interest rates could be behind us. “If you’re going to delay your borrowing decisions until rates return to 2.25%, you could have a long wait,” he says.
Recent data from the Office for National Statistics (ONS) suggests the outlook is brightening, with business closures slowing by more than 10% in the second quarter of 2024 compared with Q2 of 2023. According to the Sage Small Business Tracker 2024, revenues are increasing and profits are rising. With inflation steady, it’s getting easier for small businesses to control their costs.
If the November cut signals the direction interest rates are heading, growth plans, investment goals and dreams of buying premises could become a reality for more small businesses.
Image source: Getty Images
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