Bank of England raises rates with one in seven micro businesses still not fully trading  

6th May 2022

The Bank of England’s Monetary Policy Committee’s vote to increase the base rate to 1%  follows the release of ONS figures showing that 16% of microbusinesses are still not currently fully trading (compared to only 3% of big businesses) meaning that small businesses will be hit harder with a ‘cost of doing business.’

Responding the news,Federation of Small Businesses (FSB) Chair Martin McTague said “Small businesses are caught between a rock and a hard place: spiralling operating costs on one side, rising personal and professional debt costs on the other.  ”

“The hope is that today’s move goes some way to putting the brakes on input price inflation in a way that hasn’t been achieved by previous rate rises, mitigating the pain of higher debt repayments.”

“When we spoke to members over the first lockdown, the majority were carrying debt, and four in ten were concerned that their debt was now ‘unmanageable’.Those with bounce-backs are rightly protected with a fixed rate on those facilities, but a lot of the wider personal and professional loans that small businesses and sole traders hold will move in line with the increase today.”

“Consider the electrician who is trying to manage surging fuel prices and the costs of supply chain disruption at work, whilst also being hit by spiralling utility bills and, now, higher mortgage repayments at home.”

“Microbusinesses are especially hard-hit by the cost of doing business crisis. Energy costs are particularly difficult to manage, as they are not eligible for the relief offered to consumers, and don’t benefit from the leverage that big businesses can bring to bear. As these new figures show, their fight to bounce back from Covid is that much greater than for a lot of big corporates.  ”

“Those with coronavirus business interruption loans will be feeling particularly apprehensive after today’s increase, which is why we’re urging government to extend Pay As You Grow options to CBILS customers to ease at least one of the mounting pressures they face.  “We’re also encouraging policymakers to look again at our debt for employee equity proposals, giving the minority who are really struggling to repay bounce-backs the option to convert to an employee ownership trust model – protecting livelihoods, improving productivity and protecting taxpayer funds in the process.”

“This is a moment for the banks to step up: helping their small business and sole trader customers to manage the effects of rising rates responsibly. Widespread collapse is not good for anyone long-term.”

Kitty Ussher, Chief Economist of the Institute of Directors, said “We welcome the Bank of England’s judgement that the need to tackle high expectations of inflation is of greater concern than the risk of curbing demand too fast in the short-term.”

“Our own surveys show that only a third of our members currently expect inflation will come back to the Bank’s 2% target before 2024 and much of the current uncertainty business leaders are feeling comes from having to operate in an environment where prices are unstable.”

“The Bank, however, has today said it expects inflation to be near the 2% target two years from now, which will be welcome to business leaders.”

“The Bank has also signalled that further interest rate rises are on the cards, to around 2.5% this time next year. If, however, cost of living pressures cause households to rein back on discretionary spending, or further difficulties in our export markets cause British companies to suffer lower orders, this assumption may need to be revised.”

Whilst Douglas Grant, Group CEO at Manx Financial Group said “Interest rates have reached a thirteen year high as inflation continues to rise, exacerbating the cost of living crisis. We believe that demand for working capital is set to soar to unprecedented levels as more businesses desperately require liquidity provisions to counteract rising interest rates, supply chain issues, increases in wages and additional pandemic-induced headwinds. With the cost of borrowing set to increase, many SMEs are struggling and will continue to be challenged this year.”

“Having successfully deployed multiple relief schemes – BBLS, CBILS and RLS – for SMEs throughout the pandemic, the UK government should, in our opinion, now turn their attention towards a permanent loan scheme to help leverage businesses going forward. Now is a vital time for the Government to work together with traditional and alternative lenders to guarantee the future of our SMEs and to ensure the successes of these emergency schemes are not wasted.”

“In this post-pandemic era many SMEs are at a critical tipping point, some between failing and surviving, others between surviving and thriving. As the government looks for ways to power the economy’s resurgence, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies, and in turn, our economy. SMEs would be well-advised to take stock of their current capital structure and if appropriate, access fixed term, fixed rate loans to prevent additional exposure to an increasingly volatile lending market.”