It’s been a tough few years for SMEs with The Centre for Economics and Business Research predicting that around 7,000 UK business could go under each quarter in 2024, however there could be light at the end of the tunnel with falling interest rates next year. Many experts predict that rates will now peak early 2024 before gradually falling to around under 4%.
Currently, UK interest rates stand at 5.25% (Oct 2024), following a substantial increase triggered by the Covid-19 pandemic and geopolitical tensions such as Russia's war with Ukraine. With many now planning budgets for 2024, let’s explore how falling interest rates can positively impact UK SMEs and provide them with opportunities for growth and stability.
Understanding the impact of interest rates
Before delving into the ways falling interest rates can benefit UK SMEs, it's crucial to understand how these rates affect the economy. The Bank of England controls interest rates, and they play a pivotal role in shaping the financial landscape of the country. Lowering interest rates is a monetary policy tool employed to stimulate economic growth. It makes borrowing cheaper and encourages businesses and individuals to invest and spend.
Lower borrowing costs
One of the most immediate advantages of falling interest rates for SMEs is the reduced cost of borrowing. When interest rates are low, banks and financial institutions offer loans and credit at lower rates, which means SMEs can access capital at a more affordable cost. This can be a game-changer for small businesses looking to expand, invest in new equipment, or hire more employees.
Encouraging investment and expansion
With cheaper access to capital, SMEs are more inclined to invest in their businesses. They can embark on expansion projects, launch new product lines, or enter new markets. This increased investment not only benefits individual SMEs but also contributes to overall economic growth.
Enhanced cash flow
Falling interest rates can lead to improved cash flow for SMEs. Reduced interest payments on existing loans free up capital that can be reinvested in the business. This additional liquidity can be used for various purposes, including paying suppliers, covering operating expenses, and exploring new opportunities.
Competitive advantage
SMEs that take advantage of lower interest rates can gain a competitive edge. They can offer more competitive pricing to customers, which can attract new clients and retain existing ones. This can lead to increased market share and business sustainability.
Debt management
For SMEs that already have debt on their balance sheets, falling interest rates can provide relief. As interest payments decrease, businesses can allocate more funds toward paying down their principal debt. This helps in reducing long-term financial burdens and improving overall financial health.
The debt-to-assets ratio of a company provides insight into the extent of its indebtedness. An advisable debt ratio typically falls within the range of 1 to 1.5, although the ideal ratio may differ depending on the specific industry. For instance, manufacturing companies, which often require substantial investments in equipment, may have ratios exceeding 2.
Supporting employment
With the ability to expand and invest, SMEs often create more job opportunities. A flourishing SME sector can contribute significantly to reducing unemployment rates and bolstering the overall labour market.
In short…
Falling interest rates in the UK can be a boon for SMEs. While it’s too early to say if we’ll see substantial reduction in rates, any cuts will lead to lower borrowing costs, encourage investment and expansion, aid in debt management and support wider employment growth.
