Interest rates

Small businesses are sounding the alarm as UK interest rates soar

Jess Christman wants to expand her forestry business in the Scottish Highlands but fears that rising interest rates will hamper her investment plans.

The 64-year-old is looking to capitalize on UK sanctions on Russia, which halted the export of timber to Britain, while paying off the debt he owed contract during the Covid pandemic.

“There is a market here for larch from Scotland to replace the wood that came from Siberia,” he said, explaining that there is an opportunity to break out of his traditional wood. exploitation of wood chips in making eco-lodges using the tree, which grows abundantly in the region.

“My concern is about the high cost of repaying the loan we took out during the pandemic and the chances now of locking in new affordable finance as interest rates rise,” he added, as he urged the government to consider extending the repayment period for Covid-19 State Guaranteed Loans.

Christman’s concerns reflect growing worries among small and medium-sized business owners about how they will cope with rapidly rising interest rates following market turmoil sparked by the government’s controversial ‘mini’ budget.

The prospect of a rate hike comes amid near-record SME debt levels, close to those reached in 2020 as companies borrowed to survive the Covid lockdowns.

UKFinance, the banking trade body, values ​​small business borrowing at £204bn, significantly higher than the £167bn in 2019, before the pandemic hit. About half of that debt has been lent at floating rates, meaning the cost of servicing it will rise sharply if interest rates were to more than double next year, as many economists predict.

Much like the mortgage freeze, triggered by the fallout from Chancellor Kwasi Kwarteng’s proposed tax cuts, corporate lenders have begun to reassess or withdraw products and readjust their risk profiles as credit committees take a more conservative approach.

The new administration of Prime Minister Liz Truss had hoped the tax cuts would help spur business investment and revive the faltering economy, but instead the ‘mini’ budget only added to the financial pressures that small businesses were already facing.

Andrew Taylor, commercial director of Running High Events, which organizes the Bath Half Marathon, was forced to take out a state-backed £190,000 coronavirus commercial loan to cover overheads, staff and other costs after the event is canceled during the pandemic.

Andrew Taylor of Running High Events says rapidly rising debt financing costs are holding his business back © Jon Rowley/FT

He said the economic outlook had already hit sales and rising inflation had raised wages and supplier costs. “We have a clear plan to trade during this volatile time, but the debts the business has been forced to take on during the pandemic will act as a drag on profitability for the next five years,” he said. declared.

Bank loans and credit cards are used by around a quarter of SMEs for financing purposes, according to a British Business Bank survey in 2021. Around one in seven also used an overdraft.

Gemma Wright, Yorkshire managing director at Reward Finance Group, which provides finance to SMEs across the UK, said brokers’ comments were that they had “never experienced a week like this” account given the market disruption following Kwarteng’s “mini” budget.

She said some lenders have pulled products and changed existing offerings as rates rise in the market. “Many of us are still lending, but traditional banks are taking longer to make decisions. No one knows where the rates will end up – it’s a pricing challenge for some lenders, but financing is still available for SMEs.

Ravi Anand, chief executive of ThinCats, said many businesses will be paying double-digit interest rates in 2023, with costs already higher for many.

ThinCats typically lend at around 7% more than the base rate, for example. This means businesses looking for new loans are now being offered 9.25% since the recent hikes.

Anand said some companies are struggling to get funding. “There’s a whole range of businesses that you can’t finance, especially those exposed to the consumer sector. We focus on bigger and safer businesses.

He predicted that banks would find it increasingly difficult to lend to certain companies because it was “too complex to price” given the market volatility. “Good companies will get funding, but a lot of things won’t happen.”

Stephen Pegge, managing director of commercial finance at UKFinance, which represents lenders, said there were “many options available to businesses seeking finance” and that lenders had the ability “to support businesses that seek to borrow”.

But he conceded that after a strong August, companies’ intentions to seek funding were “as weak as I’ve seen”. The use of invoice financing for working capital was on the rise, he added, and where small businesses were borrowing, the trend was “towards fixed rather than floating rates” to lock in loans ahead of increases. future.

Kate Nicholls
UK Hospitality’s Kate Nicholls has warned that a higher interest rate environment will leave many of its members vulnerable © David Cotsworth/UK Hospitality

He said rates are expected to rise more than expected and could put pressure on the most exposed companies. “Obviously some sectors have borrowed more – such as retail and hospitality – which will be difficult if consumer confidence continues to decline.”

Kate Nicholls, head of lobby group UKHospitality, said the prospect of higher interest rates would leave many pubs, restaurants and hotels vulnerable as they emerged from the pandemic with higher borrowings than other parties economy.

She estimated the debt stood at £12billion, around double the level of deposits, and said members applying for new loans were reporting they were being offered rates of over 10%. “A lot of people can’t really fundraise at this rate,” she added.