How will the decision to stabilise interest rates impact on British Business- we look at the likely options for the 10 most popular sources of finance for business.
What does it mean to business if interest rates stabilise?
Essentially if interest rates remain at 5.25% for the coming months the cost of borrowing will level out too – where most alternative lenders borrow funds from larger institutions, they’re blended cost of capital has gone up in line with base rates over the last 14 months. In many instances this has been passed on to customers to maintain margins on lending other than for things like the Business Bounce-Back loans (BBL) where the interest rates and so costs are fixed.
The Bank of England's decision to maintain the current interest rates has far-reaching consequences for the UK's economic landscape. Businesses across the nation are watching closely, as the interest rate environment significantly influences their ability to secure loans, manage working capital, and access government-backed schemes like the Recovery Loan Scheme (RLS). In this blog post, we will delve into the impacts of stable interest rates on business borrowing and explore various financing options available for businesses in the UK.
The Bank of England’s decision can only be considered a positive effect for SME’s that rates stabilise. It also allows businesses to effectively forecast and plan, whereas over the last couple of years when mortgage repayments have pretty much doubled, business planning horizons could only be short term. Many businesses need a more long term view when considering capital investment or for example making expansion decisions that will be supported or funded by borrowing.
Is the long term projection to increase or decrease and what is the short, medium and long term?
This really depends who you listen to at Greenwood Capital, we think that the general consensus is that rates should plateau between now and Q2 2024 to what many believe will be a peak at 5.75%. The current projection is that base will come back down to a number starting with a 4 within the next 3 years. Beyond that for the longer term it is very difficult to say as there are so many other factors that will affect the economy. In the short and medium terms, we have already experienced the impacts of global climate change impacting on freak weather and then with war in Ukraine and unrest in the Middle East, the landscape for 10 years or more is very unclear although many are considering longer term business investments such as Green Energy finance but rather than altruistic, that is probably more about securing stability in energy costs for the long term.
What are the main instruments of finance for business and how will they be affected?
We have looked at the main sources of business funding and whilst we would look at the entire range of options for your business funding needs, for this Blog we have focussed on the most popular 10 sources of business funding.
1. Bounce-Back Loans CBIL’s and Bank Loans in general
BBL’s are fixed rate and aren’t affected by base rate increase or decrease– our view at Greenwood Capital is don’t ever refinance them, no one is ever getting cheaper money.
CBILS however are variable rate and are affected by changes to base rates. The rate on CBILS will vary by lender to lender, there could be cheaper facilities out there now, worth looking for! The same is the case for loans in general. Some very lucky businesses negotiated fixed rates but most are variable and link to Bank base rates and so have experienced increasing costs. If you have funding like this it is always worth looking to see if there is an alternative source of business funding. Companies seeking working capital loans, recovery loans under the RLS, or various other financing solutions such as asset finance, can now make more informed decisions about their borrowing needs.
2. Recovery Loan Scheme (RLS)
The RLS, backed by the British Business Bank, continues to be a lifeline for businesses trying to recover from the economic setbacks caused by the pandemic. The stability in interest rates ensures that businesses can access this government-backed loan scheme at reasonable costs, facilitating their recovery and growth. In reality, it probably benefits the lenders more than the end user as there is a 70% Government guarantee but there are cheaper options available.
3. Asset Finance and Refinance
Asset finance options, including equipment finance, company car leasing, and asset refinance, are essential for business growth. Stable interest rates make these financing avenues more attractive, helping businesses acquire or refinance critical assets at a manageable cost.
4. Invoice Finance and Factoring
For businesses dealing with cash flow challenges, invoice finance, and factoring become crucial. Stable interest rates can reduce the cost of these financing options, making it more affordable for companies to access working capital. Particularly good for growing companies as the lending facilities grow with their invoicing growth helping to fund that growth.
5. Business Vehicle Leasing
Company car leasing and finance, a common requirement for many businesses, are positively impacted by stable interest rates. This stability enables businesses to secure corporate loans for vehicle leasing without the uncertainty of fluctuating interest costs. Whilst not long-term most decisions related to vehicles are 3-5yr decisions and better understanding that cost is important.
6. Agriculture and Construction Finance
Stable interest rates also benefit industries like agriculture and construction, where financing is essential for equipment purchase or expansion. Construction is rarely undertaken without some form of funding often at a premium rate of interest and the finance is frequently cycled as the development reaches critical stages of construction. Usually variable rates any stabilisation will benefit costs. Businesses in these sectors can access loans at more reasonable terms, enabling growth and modernization.
7. Long-Term Business Funding
For those seeking long-term financing solutions, stable interest rates provide predictability and lower borrowing costs. Whether for commercial mortgages or other long-term business loans, this stability supports financial planning. Recent months have seen mortgage rates rise regularly in some cases for interest only loans, interest costs have risen several fold prompting many to look at refinancing in one form or another or indeed selling buildings and land as prices are still buoyant.
8. Overdrafts and Alternative Overdraft Loans
Stable interest rates also benefit businesses seeking alternative overdraft loans, offering a more stable borrowing environment with reduced interest costs. Clearly, overdraft funding suffers an immediate impact when interest rates move and it may be prudent to reconsider using an overdraft continuously for business funding when other options may work better.
9. Green Finance for Business
Businesses committed to sustainability can access green finance at competitive rates, as stable interest rates make such investments more appealing. Increasingly, businesses are considering funding for things like electric cars or green energy as the additional benefits for the business make funding a project appealing. Electric cars for example benefit from capital write off or 100% expensing in year 1. Additionally, for large commercial roofs, solar energy is now a real and viable option even though the Feed In Tarriff has significantly reduced, so too have the costs of installation and with the improvement in battery storage technology and reducing battery costs has meant a significant step in stabilising energy costs.
10. Secured Business Loans and Asset Backed Lending
As asset values have significantly increased in recent years, there may now be an opportunity to leverage those increased values to secure funding that will replace more expensive unsecured lending and perhaps consolidate your business finances. Whilst the cost of that funding might be less there are other considerations, if businesses have raised funding against assets or property, there are typically early repayment charges, and in some cases they are liable for the whole interest on the facility they’ve borrowed. This isn’t the case with unsecured working capital funding however and it may be time to switch funding to lower cost secured sources of funds.
Reducing Business Funding Costs as Interest Rates start to fall
Businesses keen on reducing their interest costs now have an environment that fosters cost-effective financing. With a stable interest rate, they can explore various financing options to optimise their borrowing. At Greenwood Capital, we recognise that there’ll be many opportunities to consolidate higher priced loans into cheaper longer term facilities.
The Bank of England's decision to stabilise interest rates has far-reaching implications for businesses in the UK. With predictability in the borrowing landscape, we can help companies explore various financing options, including government-backed loans like the RLS and re-financing CBILS, as well as asset finance and invoice factoring. Stable interest rates reduce the cost of borrowing and enhance the feasibility of financing options, supporting business growth and economic recovery. To find the best business loans and financing solutions tailored to your needs consider consulting with us, we take a bespoke view and meet each of our clients personally and work hard to find the best solutions for your finance both now and in the future. We apply our considerable experience and don’t apply a ‘one size fits all’ approach as many other financial institutions or online platforms like Funding Circle, Fleximize, and Iwoca do. They may offer a wide range of ‘off the shelf’ options but such important decisions need that personal touch so that businesses can make more informed, cost-effective financing decisions and ensure a stable financial future.
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