New SME borrowing rates rise to 6.61%: what to do before taking a loan

Bank of England Money and Credit statistics published on 1 September show that the effective rate on newly drawn SME loans rose by 25 basis points in July. SMEs still borrowed £0.8 billion more from banks and building societies than they repaid during the month, and annual SME borrowing growth held at 4.1%.

The data describe aggregate bank lending. They do not cover every specialist product in the market, and they do not tell an individual applicant what rate it will receive. A secured property loan to an established company and a short unsecured facility to a young business can price very differently.

Bank Rate influences the cost of money, but commercial pricing also reflects funding costs, the lender’s capital requirements, the applicant’s default risk, security, expected recovery, operational costs and competitive appetite. Fixed-rate offers may move before or after an official decision as market expectations change.

On 30 July, the Monetary Policy Committee held Bank Rate at 3.75%, although three of nine members preferred an increase to 4%. The second-quarter Credit Conditions Survey also reported a slight reduction in credit availability for small and medium companies. Neither result means every lender will tighten or every borrower will pay more.

For variable-rate borrowing, calculate repayments at the offered rate, then at one and two percentage points higher. The point is not to forecast the next Monetary Policy Committee vote; it is to find the level at which the facility begins to squeeze payroll, tax, inventory or essential investment.

A fixed rate reduces one uncertainty but may introduce early-repayment or break costs. Ask how long the quote is valid, when the rate becomes binding and whether fees are deducted from the advance. If £100,000 is approved but £5,000 of fees is withheld, the business receives £95,000 while the repayment calculation may still use the full facility amount.

A longer term can reduce each monthly payment but increase the lifetime interest bill. A short facility can be cheaper overall but create an avoidable refinancing cliff. Match the term to the economic life and payback period of the thing being financed.

Short, repeatable cash-flow gaps may suit an overdraft, revolving facility or invoice finance better than a lump-sum loan. Equipment may fit asset finance. A defined expansion programme can fit a term loan. Comparing like with like is essential: a nominal rate, factor rate and discount fee do not measure cost in the same way.