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Last week’s cut of the Bank of England’s (BoE) base interest rate by 25 basis points was largely seen as a step in the right direction as the UK seeks to improve productivity and growth, even if some wanted a faster, more powerful boost by doubling the cut.
The BoE remains hesitant to give inflation the opportunity to rise again, so won’t lower interest rates too quickly, but lower mortgage repayments and borrowing rates were the big wins to take away for the public and business sectors alike.
However, not all businesses look set to see significant benefits from the rate cut. Or, perhaps more accurately put, the benefits they’ll receive from interest rates dropping to 4.5 per cent is a mere drop in the ocean alongside other cost pressures they are still facing from the past couple of years, and those which lie ahead.
There are around five and a half million Small to Medium-sized Enterprises (SMEs) in the UK, broadly defined as such by having fewer than 250 employees and a turnover of less than €50m.
The governments of the day frequently herald them as vital parts of the nation’s economic growth, yet because of their size and relative financial positions they can also be some of the businesses most affected by changes to regulations or costs.
While lower borrowing costs are a positive for those who are trying to expand operations or reinvest in their own companies, a much wider range of SMEs are fighting against a rising tide of issues that they have no say in making or undoing.
The Federation of Small Businesses – a UK organisation campaigning for the SME community – has called upon lenders to pass interest rates on quickly so companies can “think about growth and future plans, rather than just survival”.
Chair Martin McTague added that lower borrowing costs could “encourage small firms to take a chance on a new piece of equipment, bigger premises, or a training course to expand their skills [which can] help to deliver the economic growth that we all want and need to see.”
But others point out that the rate drop alone is nowhere near enough to make a meaningful impact.
Costs aplenty on one side, a single cut on the other
Unity Trust Bank works with charities, trade unions and other organisations to deliver positive social change. Josh Meek, chief impact officer, noted that while it took time for high street banks to pass on interest rate rises on the way up, coming down might be a different matter.
That won’t benefit savers, but it will be better for borrowers – though among SMEs, business confidence has been low and therefore so has reinvestment amid so much uncertainty.
“A reduction in the Bank of England’s interest rate comes as the country is trying to stimulate national growth and encourage businesses to spend more,” he said.
“Barriers to trade and the market expectations of tariffs will continue to influence borrowing confidence, and the upcoming impacts of living wage increases, national insurance increases and global trade are yet to be fully recognised.
“Many of the SMEs that we work with are still feeling the impact of high inflation between 2021 and 2023.
“While the cost of borrowing for those on variable rates will also be lower, we still need to consider the impact within the context of wider economic health and the uncertainty of doing business in the country. UK Finance’s reporting on SME lending shows a mixed picture on borrowing confidence. 2023 saw five consecutive quarters of reduction in SME borrowing with uneven recovery in 2024 across sector, size and bank lending.”
Tariff uncertainty
While tariffs for UK products exported to the US are not yet in place, that doesn’t mean small businesses are not affected by them. Products that are made in China, for example, and then shipped or finished in the UK and then sold Stateside are still subject to tariffs.
Adding on significant costs can see businesses lose customers, while swallowing the added costs themselves hurts profitability.
Aman Parmar works at Bizspace, a flexible workspace company who see SMEs as a part of their client base.
They noted the rate cut was “no doubt a welcome step” for the Labour government’s policy of economic growth and long-term stability, but suggested there was little immediate and notable impact for SMEs.
And with National Insurance and minimum wage costs set to rise by 1.2 percentage points and 6.7 per cent respectively, it’s clear that a 0.25 percentage points cut in one expense simply isn’t going to have enough of a tangible effect.
“It did little to address the immediate impact to small businesses already struggling to keep their businesses afloat in the current economic climate,” they said.
“Many savvy consumers who find themselves with extra income to spend will actively seek out independent retailers or family-owned businesses, and since the devastation of the Covid pandemic, tend to see surviving small, local and independent companies as the lifeblood of economic growth within their regional communities.
“But SMEs will still be erring on the side of caution over the next few months as we approach April and the new tax year, when significant budgetary changes come into effect.
“The upcoming reduction to business rate relief from 75 per cent to 40 per cent has also no doubt been a significant concern for those running small businesses within the hospitality, retail and leisure sectors.”
Outside of business
It’s not just businesses either, with charities and other social sector organisations still widely struggling too. Small interest rate drops do not necessarily impact positively enough on those using their services, so demand continues while costs are rising.
Unity’s Mr Meek added: “The Charities Aid Foundation has found that 86 per cent of charities and organisations delivering critical services for vulnerable people have experienced an increase in demand. Meanwhile, 50 per cent said competition for funding was up with many sharing cuts to their workforce making it harder to service the needs of their communities.
“Base rate changes are unlikely to ease the demand these organisations are seeing any time soon, as they continue to feel the impact of reduced funding, rising costs and increased uncertainty.
“However, if the rate reduction is an indicator of steps to stabilise inflation and address cost of living challenges, this should enable key services to support communities across the UK to get on a better footing to serve those most in need.”
As is evident, the interest rate cut is a small footstep along the path to where the UK wants to be from an economic perspective, but it is far from an immediate solution to the problems many are facing.
