UK inflation has risen again, and the inflation business lending squeeze that follows matters to any small business with a loan, an overdraft or a refinancing deadline coming up. Swoop Funding has set out four practical steps SMEs should take to limit the damage as borrowing costs edge higher.
Inflation has risen again, and Swoop Funding says that matters to any small business carrying debt or planning to refinance. The Consumer Prices Index (CPI) is the Office for National Statistics’ main measure of inflation, and when it climbs above the Bank of England‘s 2% target, the Bank’s Monetary Policy Committee often responds by raising the Base Rate, the benchmark that filters through to commercial lending.
For small firms, the squeeze comes from two directions at once. Higher inflation pushes up the cost of raw materials, energy, stock and wages, eating into margins. At the same time, a higher Base Rate makes servicing existing debt more expensive, leaving less working capital for day-to-day trading. Firms sitting on foreign currency reserves may also want to check Flagstone’s new dollar and euro SME savings accounts for better returns while rates stay high.
Who feels it first
Businesses on variable-rate loans, overdrafts or revolving credit facilities feel the change immediately, since repayments move in step with the Base Rate. Swoop Funding warns that even a fractional rate rise can meaningfully increase annual debt-servicing costs for firms already working on tight margins, a pressure that has also pushed lenders like the British Business Bank’s expanded Performance Finance facility to widen access to asset funding.
Companies coming to the end of a fixed-rate deal face a different problem. Firms shut out by mainstream lenders may also want to see how the British Business Bank’s expanded vehicle and asset funding facility could help. Rolling off a historically low fixed rate into today’s market pricing can mean a noticeable jump in monthly repayments, which is exactly the pressure firms considering a commercial property refinance need to plan for well ahead of their renewal date. Lenders offering fixed terms, such as Recognise Bank’s five-year fixed commercial mortgage, have become more attractive to owners who want certainty over the next few years rather than exposure to further rate moves.
Lenders are getting stricter
Swoop Funding says commercial lenders are responding by tightening their risk models, similar to the extra headroom lenders like Performance Finance Limited are being given to keep lending to smaller firms. Expect closer scrutiny of cash flow, stricter debt serviceability checks, and in some cases requests for stronger security or personal guarantees on larger facilities. Asset-backed lending, such as invoice finance or equipment finance, tends to stay more accessible because it carries lower risk for the lender, which is one reason deals like Time Finance’s takeover by Ultimate Finance’s parent matter to firms relying on that type of funding.
What Swoop Funding recommends
Swoop Funding’s four suggested moves are: audit existing debt to separate fixed from variable facilities and map maturity dates; explore refinancing early rather than waiting for a fixed deal to expire; use invoice or asset finance to release cash tied up in unpaid bills or equipment instead of taking on expensive unsecured credit; and stress-test cash flow against a further one to two percentage point rise in borrowing costs.
Firms with spare cash sitting in the business should also check where it is earning the most, something that has become more relevant since Flagstone extended its SME savings options to US dollar and euro accounts. And any business chasing asset or vehicle finance may find more headroom now that the British Business Bank has lifted its Performance Finance facility by £30m.
What to do now
Owners cannot control the Base Rate, but they can control how exposed their business is to it. Pull together a list of every loan and facility, note which are fixed and which are variable, and flag any renewal dates in the next twelve months. Then talk to a broker or lender about locking in terms before the next rate decision, rather than after it.
