Borrow now, SMEs advised

/ 20 July 2015

Daniel Shear

‘Following Mark Carney’s suggestion that the Bank of England could raise interest rates around the turn of the year, the Independent’s David Prosser argues that SMEs should think about borrowing sooner rather than later. He says there is still a widespread reluctance on the part of small businesses to borrow, but argues that firms will only end up paying more to take on capital if they wait until rates increase.

Source: The Independent’

There is some logic to this argument, but only some. If rates increase by 0.25% in early 2016 then someone borrowing a term loan now will only be roughly £125 better off per £100,000 borrowed than someone taking out their loan in six months’ time. That’s assuming that margins over base rates don’t’ change, which is probably unlikely in the short term. Any saving is of course welcome, but given the difference is so small it’s best for an SME to borrow when commercially they need to.

Where an SME might benefit is by fixing the rate of interest on their loan. Without wishing to reopen the mis-sold interest rate hedging products debate, there are some pretty attractive fixing options around now which are likely to disappear the closer we get to base rates rising. So if an SME wants certainty on their repayment schedule fixing now may be better than in six months’ time. Of course, we say “may be better” because whilst it is most likely that fixed rates will become less attractive as base rates rise we don’t know what will actually happen at that time. As amazing as we are even we don’t have a crystal ball to gaze into.

Daniel Shear

Partner, Corporate Finance

T +44 (0)20 8922 9321
E daniel.shear@bkl.co.uk

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