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Wednesday 29th May 2024, 2:00 PM (BST)

SMEs don’t fear interest rate rises, claims ICAEW survey

Small businesses are not fazed by the idea of an interest rate increase, new figures have shown – but what could a hike mean for firms?

Interest rate rises have been talked about ever since the first signs of the UK’s economic recovery. As confidence improves and employment grows, analysts have been predicting that the era of record low, 0.5 per cent base rates could soon come to an end.

But a new survey from the Institute of Chartered Accountants of England and Wales (ICAEW) shows that even though business organisations have been warning against an increase, small firms are not fazed by the idea.



The survey of more than 500 small and medium-sized enterprises (SME) showed that some 78 per cent of respondents did not expect a future increase in interest rates to have a negative impact on their businesses. Of those, 86 per cent claimed that their firms did not have any borrowing, but had accumulated cash reserves that would shield them from the effects of a rise.

In some respects it’s encouraging that so many SMEs believe a rise in the cost of borrowing would not hamper their operations. Resilience is an important element in building a successful business. However, it appears that for many, changes in the cost of finance will make little difference because they have no growth plans to finance.

Nearly three-quarters of SMEs don’t plan to increase their headcounts in 2015 and 42 per cent expect their turnover to stay the same – although 40 per cent said it would grow. Just nine per cent said that they considered major investment in their businesses as a real opportunity next year.



It seems that there is actually a fair amount of caution among UK’s SMEs. A total of 46 per cent of businesses said they considered the current economic climate to be a challenge they have to face. Stephen Ibbotson, director of business at ICAEW, says that firms are anticipated future emergencies.

“Indeed, with so many not investing, or hiring, it looks like we are in a ‘wait-and-see’ period for many businesses,” he explains. “Given that the economy is likely to slow down next year, SMEs seem to be sitting on cash to weather any storms that could arise.”

Instead, their focus is closer to home on their existing operations. Three out of ten are still struggling with challenges relating to late payments and cash flow, while 36 per cent feel the next government’s single biggest priority in 2015 should be to cut the standard rate of VAT. That would enable their businesses to grow organically.


Low rates

Perhaps when businesses are ready to invest in growth, rates will still be low enough to encourage them to borrow. The Bank of England’s latest Inflation Report was published yesterday (November 12th), predicting sluggish inflation of just one per cent over the next year. This is likely to increase to two per cent in the following 12 months, the central bank said.

While inflation is low, interest rates are likely to be kept down to encourage businesses to borrow and grow. Business organisations have reacted positively to this, with the British Chambers of Commerce saying that continued low rates will create a more stable and positive environment for firms.

“This message will be welcomed by UK businesses who will be reassured that they can plan and invest without any surprises,” said chief economist David Kern.

Whenever rates rise, it will have knock-on effects for both businesses and the broader economy. The important question will be whether they are prepared for it.

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