High Interest Rates And Inflation Still Challenging SMEs

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23 May 2023 – After the Bank of England has raised the base rate again, small businesses continue to face high interest rates and inflation, which could damage their prospects severely.

For the 12th consecutive time, the Bank of England (BoE) has raised the base rate, from 4.25% to 4.5%. The Bank is still trying to bring down inflation, which is still around 10%, to its target of 2%.

The BoE does expect inflation to fall quickly and anticipates to reach the target of 2% by late in the next year. However, this further rise will be a blow for small businesses, who hoped that no further rises would be made.

Even though inflation fell slightly in March, it is staying high for longer than expected. This made a further base rate rise inevitable. But the impact high interest rates and inflation have on small and medium enterprises (SMEs) can be devastating.

Business Confidence Rising Despite High Interest Rates And Inflation

Even though business confidence has risen, according to the Federation of Small Businesses, it’s still not in positive territory, with SMEs still facing an uphill struggle.

The FSB’s Small Business Index showed that 92% of small businesses said their costs were higher in Q1 of 2023 than in Q4 of 2022. This is a record high number.

However, 40% of small businesses anticipate their sales to increase in the next quarter, proving that business confidence has recovered somewhat since it dropped sharply at the end of last year.

But there are still plenty of challenges ahead. High interest rates and inflation have weakened consumer confidence. Food prices are 19% higher than a year ago and mortgage costs have also risen sharply for many.

As a result, many have to restrict their spending, which has a big impact on small businesses across the UK.

In April the National Minimum Wage and National Living Wage have gone up again, which increases staff costs for many small firms. Several thresholds have also been frozen or dropped, which are basically tax rises without calling them that.

The Government support for energy bills for businesses has also been reduced hugely, which has meant many will have seen their bills rise.

With rate rises dampening consumer demand and making many business debts more expensive, small firms are absolutely up against it, while Government energy support has fallen away, leaving many exposed to spiralling utility bills.

Martin McTague, National Chair of the Federation of Small Businesses

For the economy to recover, small businesses have to invest in growth and thrive. But the FSB says that this is a struggle for most, with hardly any support in place.

That’s why the Federation is calling on the Prudential Regulation Authority to abandon plans to remove the SME supporting factor. This would make it more difficult for small businesses to borrow money, because the supporting factor makes lending to SMEs less capital-intensive.

The FSB is also calling on the Government to sort out the longstanding problem of late payments. This is locking up cash in supply chains that small businesses need for day-to-day operations as well as to invest.

Banks Less Keen On Lending To SMEs

With affordability of and accessibility to credit vital for small businesses to grow and thrive, new data by iwoca is worrying. According to the small business lender, 77% of brokers reported a drop in the number of high street banks funding SMEs.

Iwoca’s data also shows that 39% of brokers said they have seen more applications for funding being rejected over the first three months of the year. With high street banks no longer willing to support small businesses, SMEs have to turn to alternative lenders.

This could mean higher borrowing costs, which will have risen already due to the further rise in interest rates. The lack of wide access to funding for small businesses is a risk to the UK’s economic recovery.

SMEs make up the vast majority of UK businesses, so giving them access to funding and support to grow is critical for driving the economy forward. If our SMEs thrive, we all benefit, in terms of job creation, skills and GDP.

Neh Thaker, Fintech Expert and HedgeFlows Cofounder

Without access to finance, small businesses are at risk of folding. According to iwoca’s data, 75% of brokers say the small businesses they are working with are worried about not being able to survive increasing energy costs.

With 52%, the main concerns for SMEs are increased running costs or inflation. This is a big increase compared to the last quarter in 2022, when only 34% named these as main concerns.

This shows that small businesses have not yet weathered the storm. High interest rates and inflation will be a problem for them for some time to come. 2023 appears to pose many challenges for UK’s small businesses, with help from the Government in short supply.

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The Business4Beginners news team consists of several writers who each have their own unique experience in businesses. By keeping their fingers on the pulse, they bring you the latest in news and trends impacting small UK businesses.
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