Further rise in interest rate will cost firms £355m

● SMES to be hit hard due to way most loans to the sector are set up

0 Marc Bajer warns many smaller firms will get burned by another hike by the Bank of England A further rise in interest rates by 0.25 per cent will add £355 million to interest rate payments for small and medium sized firms in the UK within a year, according to experts.

Research by debt advisory firm Hadrian’s Wall Capital (HWC), said rising interest costs will be entirely passed through to many small businesses due to the lack of fixed-rate lending available to them.

Only £24 billion of lending to SMES in the UK – just 16 per cent of the total – is on a fixed rate basis while £128bn of lending is on a floating rate.

A 0.25 per cent increase in interest rates would see annual interest payments on these loans jump from £3.7bn to more than £4bn overnight according to HWC’S data. If the bank rate were to rise by a full percentage point to 1.5 per cent, it would cost SMES an extra £1.4bn in interest payments alone.

John Blanchflower of corporate funding adviser Bridge & York Capital Partners, which has its operational base in Fife, said that many firms have suffered the negative business impact of not having fixed rate, fixed term funding in place for acquiring business assets.

“The ability to have certainty of term and fixed pricing to match the revenues generated by the new assets is critical for certainty in building a business and managing cash flows,” he pointed put.

HWC argues that fixed-rate lending should be considered by finance advisors in order to reduce the interest rate threat embedded in variable rate borrowing.

Chief executive Marc Bajer said: “When interest rates rise, many SMES are going to get burned by a jump in their interest costs. Businesses will then become reluctant to commit to transactions if they feel that their variable financing costs are going to rise. But what choice do they have, when fixed rate loans from banks are nearly non-existent?” he asked.

Bajer said that as the era of ultra-low interest rates draws to a close, this forced reliance on floating-rate loans will come back to haunt a lot of SMES.

“A rise in the base rate to just 1.5 per cent would literally cost small businesses billions,” he added.