Small businesses fear interest rate rises

The prospects of further hikes in UK interest rates could spell danger for the many small and medium sized firms that have depended on bank borrowing to fund their business, warns leading business finance experts, Bibby Financial Services.

With the Bank of England's nine-member Monetary Policy Committee (MPC) raising interest rates four times since last November and additional hikes looking highly likely, it's hardly surprising that small business owners and managers are feeling the pressure.

The prospect of further interest rate rises are also putting a spanner in the works for the thousands of owners and managers who were planning to take advantage of the robust economy this year by expanding their business.

According to Tenon Forum, the independent business think-tank, over a third of UK small firms believe that their plans would be thrown into disarray if interest rates climbed to 5%. With analysts predicting exactly that scenario, and some even predicting an end of year rate of 5.5%, many small businesses fear that this rise will prove highly damaging. Four in10 manufacturers and over half of transport and communications firms are extremely fearful of their future prospects.

The survey also found that despite the continuing overall optimism about the economy in general, seven out of 10 small and medium sized businesses are not considering borrowing within the next 12 months to invest in growing their business. This suggests that the fear of interest rates is dissuading small and medium sized firms from opting for additional funding to finance expansion plans.

Commenting on the latest interest rate hikes, David Robertson, Chief Executive of Bibby Financial Services said, "With two thirds of owners and
managers using bank funding to finance their business, the vast majority of small firms in the UK are in a highly vulnerable position when it comes to the current increases in the cost of borrowing.

"Whilst the current run of interest rate rises are deemed by analysts and industry experts to be highly necessary for the overall economic health of the UK and to reduce inflationary pressures, it is a grave concern that so many small businesses are living in fear of further interest rate hikes.

"There are alternative funding solutions for small and medium sized businesses that protects them from the volatility of interest rates. Options such as factoring and invoice discounting and asset finance are ideal cash flow solutions for growing businesses, releasing much-needed capital tied up in assets such as unpaid invoices or plant and machinery. It is important that owners and managers look beyond traditional funding measures such as bank overdrafts and loans particularly at a time when the cost of borrowing is likely to continue to rise this year.

"The MPC has had to make some tough decisions in the face of exorbitant oil prices, the volatile housing market, the ongoing boom in consumer spending and the continuing vulnerability of the beleaguered manufacturing sector which has only recently, started to show signs of recovery. However, it is vital that any short-term improvement in economic stability is not to the detriment of the 3.8 million small and medium sized businesses that form the backbone of British industry.

"If business confidence slumps and jobs are lost, this will spell disaster for the UK's competitiveness in the global market and squash any hope of long term economic recovery."

 

8th July 2004

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