Key Takeaways
- • The Bank of England's Monetary Policy Committee raised the base rate by 25 basis points to 4% on 5 November and signalled that further increases could follow, as it battles inflation driven largely by the war in Iran and higher oil prices.
- • Alternative lenders are bracing for weaker loan demand and rising stress among UK SME borrowers, with the rate rise adding to pressure that followed the UK Budget of 28 October.
- • Multifi reports SME working capital applications running around a third higher than a year earlier, and chief executive Rob Keown-Boyd warns that higher borrowing costs could deter businesses from seeking finance when they need it most.
- • Direct lending, the core of private credit, is largely floating rate, so lender returns rise with policy rates, but sustained high rates could push up borrower defaults.
- • BoE governor Andrew Bailey said the increase is unlikely to be the last unless the conflict in the Middle East is resolved, while oil prices fell sharply this week as traders bet a Democratic sweep of the US midterms would increase pressure to end the war.
Summary
Alternative lenders serving UK small and medium-sized enterprises are preparing for weaker loan demand and growing financial stress among borrowers after the Bank of England raised its base rate to 4% on Thursday, 5 November. The Monetary Policy Committee voted for a 25 basis point increase and signalled that further rises could follow as the central bank tries to contain inflation, which has been driven largely by the war in Iran and the resulting rise in oil prices. The move follows the UK Budget of 28 October, which lenders say has already added to pressure on businesses.
SME lenders warn that higher rates may discourage borrowing at the moment it is most needed. Rob Keown-Boyd, chief executive of SME lending fintech multifi, said small businesses are already under "real pressure," with inflation at its highest level in almost a year and higher borrowing costs adding to a cashflow crisis. He said demand for working capital has risen, with applications at multifi running around a third higher than a year earlier, and cautioned that "the real challenge is being able to access finance." Nick Smith, chief executive of Leeds-based lender Reward Funding, argued that the government has struggled to establish the consistent growth needed to give businesses confidence to invest, and warned that firms focused on managing immediate pressures may deprioritise investment and growth.
For private credit lenders, the effect of higher rates cuts both ways. Direct lending is largely floating rate, so returns rise with policy rates. However, borrowers' interest costs rise too, and if rates remain elevated over the long term, defaults could increase. BoE governor Andrew Bailey said the increase was unlikely to be the last unless the Middle East conflict is resolved. Oil prices fell sharply during the week, as traders bet that the Democrats' sweep of the US midterm elections would increase pressure on the White House to end the war.
Mike Randall, chief executive of non-bank lender Simply Asset Finance, said lenders need to act as "genuine partners to SMEs, helping them access the right funding solution, at the right time, so they can invest strategically, improve productivity, and continue to grow."
SME lenders warn that higher rates may discourage borrowing at the moment it is most needed. Rob Keown-Boyd, chief executive of SME lending fintech multifi, said small businesses are already under "real pressure," with inflation at its highest level in almost a year and higher borrowing costs adding to a cashflow crisis. He said demand for working capital has risen, with applications at multifi running around a third higher than a year earlier, and cautioned that "the real challenge is being able to access finance." Nick Smith, chief executive of Leeds-based lender Reward Funding, argued that the government has struggled to establish the consistent growth needed to give businesses confidence to invest, and warned that firms focused on managing immediate pressures may deprioritise investment and growth.
For private credit lenders, the effect of higher rates cuts both ways. Direct lending is largely floating rate, so returns rise with policy rates. However, borrowers' interest costs rise too, and if rates remain elevated over the long term, defaults could increase. BoE governor Andrew Bailey said the increase was unlikely to be the last unless the Middle East conflict is resolved. Oil prices fell sharply during the week, as traders bet that the Democrats' sweep of the US midterm elections would increase pressure on the White House to end the war.
Mike Randall, chief executive of non-bank lender Simply Asset Finance, said lenders need to act as "genuine partners to SMEs, helping them access the right funding solution, at the right time, so they can invest strategically, improve productivity, and continue to grow."
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