Interest rate rises to cost SMEs £13.6bn
Anticipated interest rate rises are set to cost small- and medium-sized enterprises (SMEs) an extra £13.5bn per year in loan repayments.
According to new research from debt advisory firm ACP Altenburg Advisory, UK businesses with floating loan rates are currently paying £17bn per year in interest payments, at an average interest rate of 4.5 per cent.
However, with further base rate rises predicted in the short term, Altenburg estimated that value of SME loan repayments could rise to £30.6bn within the next nine months.
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Dan Barrett, partner at Altenburg, urged business owners to start planning for higher repayments now.
“With interest rates expected to rise well into next year, many businesses could struggle to meet their interest and principal debt service obligations if they don’t start planning now,” he said.
“It’s more important than ever for businesses to understand how interest rates and inflation can affect their costs.
“If businesses think they are going to struggle to meet their loan repayments, they should consider options to reduce their payment obligations, which could include looking to refinance or talking to their lenders about amending the term of their loans to reduce annual repayment obligations.”
Altenburg added that market expectations of future interest rate movements are typically made against the short-term horizon, and businesses could face an even higher bill in the medium term depending on how economic conditions develop.
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“Further volatility in interest rates could make it harder for businesses to get fixed rate loans as those lending products are withdrawn by lenders,” added Barrett.
“And/or if rates continue to increase quickly, it could also make other hedging options at interest rates that are viable for the business materially more expensive.
“Traditional lenders are becoming more cautious in lending to companies and are performing more stringent stress testing of a business’s ability to withstand significant interest rate rises before offering funding. Whilst alternative lenders are also exercising a degree of caution, they remain keen to lend to good businesses that can demonstrate the ability to service debt under stress tested conditions.
“To ensure they can still access affordable lending, businesses need to demonstrate how they can cope with rising costs and rising interest rates.”
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