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‘Small firms need support’ after interest rate rise

The interest rate rise announced by the Bank of England will add more pressure on small firms already struggling with surging inflation and the Omicron strain, according to the Federation of Small Businesses (FSB).

Responding to the news that the Bank of England’s Monetary Policy Committee has raised the base rate to 0.25%, FSB National Chair Mike Cherry, said: “This move will increase pressure on small firms with debt – four in 10 of which describe their level of borrowing as ‘unmanageable’.

“More than a million small businesses took out loans during the pandemic, with a significant proportion of them first-time borrowers. Many took on debt more than a year ago, on the basis that Covid would be under control by now.

Interest rate rise could push struggling firms ‘to the brink’

“While Bounce Back Loans thankfully have a fixed interest rate, a lot of facilities held by firms – including Interruption Loans and debt that predates lockdowns – will be affected by the uplift, alongside personal borrowing. Any increase could push those just managing to make ends meet to the brink. There is a strong case that CBILS borrowers need to be offered flexibility over repayment, similar to the Pay as you Grow scheme that Bounce Back Loan borrowers can use.”

He added: “That said, with many businesses far past the point where they can absorb surging input costs, the hope is that this intervention helps to curb price rises. The concern, by contrast, is that this increase proves to be the worst of both worlds: too little to rein in inflation, and too much for indebted businesses who cannot afford extra repayments.

“Consumer demand has been sharply suppressed by the onset of Omicron – the imposition of Plan B and last night’s Government press conference are only exacerbating matters. The advice now is to err on the side of staying home, but that advice is not being backed up by support for businesses which have seen their takings crater as a result.

“The situation is critical. And yet, where is the support that small businesses need? We’ve put recommendations to policymakers and – in these final crucial days before Christmas – it’s more than time for the Government to step in. If it doesn’t, many smaller firms may not make it to the end of this year.”

Rise welcomed by IoD

However, the rise in the base rate was welcomed by the Institute of Directors (IoD). Kitty Ussher, Chief Economist at the IoD, said: “Business leaders will be relieved that the Bank has demonstrated its determination to take action on inflation by leading the world in raising rates even as the Omicron situation remains uncertain.

“Our internal data over the last few months had been causing us concern that high expectations of future inflation are increasingly embedded. Inflation data confirmed our suspicion because it showed price rises spreading across the economy rather than being confined to transitory factors.

“At this point in time, most business leaders are more concerned about inflation than the rising cost of debt and so this demonstration of leadership by the Bank will be welcome.”

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