Lending

Small business receives boost from historic Bank of England interest rate cut

Fred Heritage | 4 August 2016 | 8 years ago

Bank of England
Small firms could benefit from cheaper borrowing costs after the Bank of England lowered interest rates to 0.25 per cent on 4 August.
Small businesses can expect cheaper short-term borrowing costs as the Bank of England cut the UK’s base interest rate to a new all-time low of 0.25 per cent.

In its first major Monetary Policy Committee (MPC) announcement since Britain voted for Brexit on 23 June, the country’s central bank has reduced the base rate for the first time in seven years, by a quarter of a per cent.

Designed to ward off another recession, the move is likely to give an initial leg up to small firms, making it more affordable to borrow from banks and financial institutions.

Britain’s smallest ventures, including micro businesses, self-employed and freelancers, may also welcome the boost to consumer spending and demand that a cut to interest rates will bring.

Small business owners have lacked confidence in what’s been a period of significant economic uncertainty both in the run up to the referendum and the subsequent fallout from the Brexit vote and it is hoped the Bank of England decision will give firms a lift.

Early reactions from the small business community have been positive. CEO at startup group Made Simple, Howard Graham, said: This is welcome news. Startups will benefit from cheaper borrowing vital when you consider that sourcing finance is one of the first hurdles when setting up a new company.

barriers to funding can act as a deterrent for those just starting out. The ability to borrow at a lower rate could make a huge difference to the prospects of startups over the next few months.

However, despite this anticipated boost, concerns have arisen about the risk of a further drop in the value of the pound and the long-term impact on prices and inflation. Medium-term forecasts indicate a slowing of the economy, warned FSB national chairman Mike Cherry.

He added: The Bank of England and the new prime minister should carefully assess the effects of today’s cut and do all in their power to boost economic confidence and growth.

The confidence of small business owners was knocked further late last month, when several major high street banks, including NatWest and RBS, announced that business customers could be charged for holding deposits should UK interest rates fall into negative territory.

While there is not yet an indication interest rates will fall below zero, today’s cut may dissuade more small business owners from holding their capital with established lenders, and encourage them instead to seek other ways to borrow and save.

Head of alternative finance platform Growth Street, James Sherwin, said that the MPC’s announcement could spell disaster for the banking sector. Banks are already prepared to charge negative rates, so businesses may soon find they have to pay banks to hold money, meaning firms suffer even further.

businesses must look to alternative finance, not only as a way to borrow on better terms, but to earn a superior return on excess cash, he added.

Why has Virgin Money slammed the brakes on its small business lending plans?

Topic

Lending

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