Small UK business owners face being burned with a multi-million-pound bill if the Bank of England increase interest rates later this month.
New research by specialist debt adviser Hadrian’s Wall Capital (HWC) shows that a 0.25 per cent hike in rates to 0.75 per cent would cost UK SMEs another £355m in interest payments in the first year alone.
HWC said the sharp jump in interest costs would be entirely passed through to small business due to the lack of fixed-rate lending that is available to them.
It states that only £24bn of lending to SMEs in the UK – just 16 per cent of the total – is on a fixed rate basis, with £128bn of lending on a floating rate.
Further, HWC believes that a 0.25 per cent rise would see annual interest payments on these loans soar from £3.7bn to over £4bn “overnight”.
If the bank rate were to rise by one per cent to 1.5 per cent HWC has calculated that it would cost SMEs an extra £1.4bn in interest payments alone.
“Many of our customers have suffered the negative business impact of not having fixed rate, fixed term funding for business asset acquisition,” said John Blanchflower of corporate funding adviser Bridge & York Capital Partners.
“The ability to have certainty of term and fixed pricing to match the revenues generated by the new assets is critical for certainty in building a business and managing cash flows.”
Marc Bajer, CEO of Hadrian’s Wall Capital, added: “When interest rates rise, many SMEs are going to get burned by a jump in their interest costs. Businesses will then become reluctant to commit to transactions if they feel that their variable financing costs are going to rise. But what choice do they have, when fixed rate loans from banks are nearly non-existent?”
He warned that as the era of ultra-low interest rates draws to a close this “forced reliance” on floating-rate loans will come back to haunt them.
“The rates of the last ten years have been an historic anomaly,” he said.
“A rise in the base rate would literally cost small businesses billions and a lack of corporate finance activity could be damaging for the economy in the long-term. It prevents the re-invigoration of businesses that can be driven by factors such as a change of management, market consolidation and refinancing opportunities.”
The Bank of England’s Monetary Policy Committee next meets on 22 March. At its last meeting in early February the Committee, tasked with meeting a two per cent inflation target and sustaining growth and employment, voted unanimously to maintain the base rate at 0.5 per cent.
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