Fixed-rate loans leaving businesses exposed to rising interest rates

Just 11% of the £416 billion in the total stock of loans to businesses are now being provided on a fixed rate – dropping by a third from 18% two years ago – leaving businesses with huge exposure to rising interest rates, says Hadrian’s Wall Capital, the London-based specialist debt adviser.

The drop came as banks prepared for interest rate rises and de-risked their loan books. Hadrian’s Wall Capital says that this has left businesses dealing with significant uncertainty over their cost of finance, and unable to plan corporate finance activity and investment over the coming years.

The firm says that fixed-rate loans are now increasingly difficult for businesses to obtain – especially for small and medium enterprises. As a result SMEs risk seeing repayments on their loans jump substantially as interest rates rise.

A recent study by Hadrian’s Wall Capital found that the expected further rise in interest rates of 0.25% in the coming months will cost British SMEs another £355 million in interest payments in the first year alone. Data provided by the Bank of England shows that in 2012, the share of all bank loans to businesses which was fixed-rate was as high as 49%.

Hadrian’s Wall Capital says the consequences of both the Credit Crisis and the swaps mis-selling scandal has meant that SMEs are now extremely wary of using swap products. Additionally, SMEs also have great difficulty in obtaining approval from any institution to fix the interest rate on their loans using swaps, removing another layer of protection from rate rises for businesses.

With interest rates now on the rise, there is a risk that SME growth planning and corporate finance activity could be shelved for the present, as businesses choose to wait for less uncertainty over the costs of floating rate debt.

Marc Bajer, CEO of Hadrian’s Wall Capital, says: “Now is the time for small businesses to lock in to fixed-rate debt, before interest rates rise again. However, fixed-rate loans are now virtually unavailable from banks, and many SMEs are reliant on floating rate debt. Any jump in interest rates could see small businesses burned by their reliance on floating rate loans.”

“Corporate finance advisers should also consider fixed-rate debt when it comes to their corporate finance activities, so as to reduce the threat to them and to their clients, of rising interest rates. When interest rates rise, small businesses are likely to suffer financial damage – a rise in the base rate to just 1.5% would cost UK small business billions.”