9th rate rise in a row leaves small businesses between a rock and a hard place

The Federation of Small Businesses said the base rate increase means further pressure on small businesses’ margins amid the cost of doing business crisis.

FSB national chair Martin McTague said the precipitous climb in borrowing costs in under 12 months had hit small firms hard, eroding their margins at a time when many are struggling with the very cost increases that prompted the Bank of England to increase the rate in the first place.

“Energy costs are by far the biggest driver of the inflation that businesses and consumers are experiencing, and interest rate increases are doing little to rein in energy bills, while making it harder for small firms to keep the lights on,” he said.

“SMEs are collectively carrying £33 billion extra in debt, much of it index-linked, compared to January 2020, before COVID hit. Every basis point increase means extra pressure for those on floating rates, and a disincentive to apply for finance for firms looking to grow and invest.

“Our Small Business Index found that in Q3, nearly two in five small firms applying for finance were offered a rate of 8 per cent or higher, compared to a quarter of small firms in the same period in 2021.

“This was supposed to be the recovery period, where the economy got back into gear, with small firms providing the engine of growth. The cost of doing business crisis has knocked that plan off course, and many small businesses are wondering — amid strikes and disruption, near rock-bottom consumer confidence, and continued rises in input costs — how they will stay afloat.

“The government’s forthcoming announcement on how it will support businesses once the Energy Bill Relief Scheme comes to an end must have a compelling offer for small firms, one in four of whom say they plan to close, downsize or restructure in the absence of a sufficient level of energy support after March.

“Many small businesses are struggling at the moment. They need certainty and support to help them make the most of the festive season and enter the new year in a spirit of optimism.”

David Bharier, head of research at the British Chambers of Commerce (BCC), said that with some evidence of inflation now beginning to ease, it would be vital that further interest rate action does not exacerbate the recession the UK is entering.

“The increase to the interest rate will come as bad news for both mortgage holders and firms that have higher borrowing costs, particularly those who need to buy in bulk to mitigate against supply chain shocks,” he said.

“The Bank of England now faces a conundrum of when to ease monetary policy, given that the main drivers of inflation have shifted from external factors, such as shipping and raw material costs, to domestic factors, such as energy and labour costs.

“Only business investment and growth will solve the stagflation problem. Firms need to see concrete actions on the measures that produce the right environment to invest, such as infrastructure, skills, and trade.”