Last month the Governor of the Bank of England announced that base rates are set to remain at their record low in the medium term – but can businesses really bank on credit remaining cheap?
According to Mark Carney the Bank of England’s base rate will remain at its record low of 0.5 per cent until unemployment falls to 7 per cent. As the situation currently stands some 7.8 per cent of the working age population is jobless, and the figure is not expected to drop to 7 per cent until 2016.
On its face this seems like good news for businesses who rely on affordable credit. “The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely,” the Governor said. But can businesses really be safe in the knowledge that credit will remain cheap?
Rates remain a risk
Despite some reporting, the Bank of England has not announced that rates will not rise until 2016. Rather, their “forward guidance” has indicated that rates will change when specific criteria have been met. In some senses, then, the Governor has introduced a new set of factors to which businesses need to pay attention. Could a sudden drop in the unemployment rate mean an earlier rise in rates? Similarly, could a boost to household incomes cause the Bank to reconsider?
Even if it is accepted that rates will not rise before 2016, businesses need to remember that this is not as far off as it might seem. Small businesses will normally be expected to plan up to a horizon of between three and five years – and this means that you need to incorporate potential rate rises into your immediate business strategy. How will a rate rise affect your cashflow? Will you still be able to meet your debt repayments? How might it impact on your customers’ ability to pay on time?
Rates vary wildly
As every business borrower will be painfully aware, a base rate of 0.5 per cent certainly does not mean that loans are actually that cheap. The cost of a business loan depends in great part on the perceived risk involved to the lender. Businesses that pose a higher risk will receive less favourable terms – or they will not get a loan at all.
According to the Forum of Private Business, the average unsecured business loan carries an APR of around 12 per cent – far higher than the base rate. Depending on the nature of the loan this rate may also be variable, meaning that it could change over its term. Variable rate customers therefore need to ensure that rate rises are at the heart of their short-term business planning, and applicants must be confident that they would be able to continue to afford their repayments when their loan becomes more expensive.
Of course, banks are no longer the only potential route through which businesses can secure finance. Lower potential rates are one of the key advantages of peer-to-peer (P2P) lending, with some of the largest P2P platforms offering rates below 10 per cent.
Fees remain high
It is all too common for potential borrowers to consider only the headline interest rate. This is not the only cost involved in your loan. It is vital that you take into account additional expenditures like arrangement fees. These fees can be either flat or a percentage of your total loan. For example, two major high street lenders currently charge a fee of 1.5 per cent, while another levies a one-off charge, added to your loan, of £100.
Although peer-to-peer lending can be cheaper in aggregate, it is important to note that the arrangement fees for these facilities can be higher. For example, Funding Circle charge a “completion fee” of 2 per cent.
You should also remember that fees could be charged in the event that you pay your loan off early. Make sure that you properly investigate all of the potential charges to which you could be subjected before taking on a loan.
Credit is hard to come by
Finally, ostensible guarantees of low rates may seem meaningless to the thousands of small businesses that remain unable to get credit. For firms across the country, the major factor holding their business back is the availability of a loan, rather than its cost.
The banks maintain that they are keen to lend, and that apparently suppressed business borrowing is in fact down to businesses’ reticence to apply. British Bankers’ Association head Anthony Browne insisted last week that “businesses are much more pessimistic about their chances of getting money from their bank than they should be.” The latest SME Finance Monitor figures suggest that only a quarter of SMEs believe that their new application would be accepted, while in reality, Browne says, “about half of applications for new facilities get the green light.”
In the context of these figures small business owners may wish to reconsider their approach to business lending. There are, however, many new alternatives to bank finance, some of which may be significantly more attractive. Read more in our small business finance guide.