Jess Christman wants to expand his timber business in the Scottish Highlands but is worried that rising interest rates will hinder his investment plans.
The 64-year-old is looking to capitalise on sanctions imposed by the UK on Russia, which has stopped the export of timber to Britain, at the same time as he pays down the debt he had to take on during the Covid pandemic.
“There is a market here for Scottish larch to replace the wood that used to come from Siberia,” he said, explaining there is an opportunity to move from his traditional wood chip operation into making eco lodges using the tree, which grows abundantly in the area.
“My concern is over the high cost of repaying the loan we took during the pandemic and the chances now to lock down affordable new funding as interest rates are going up,” he added, as he urged the government to consider extending the repayment period for Covid-19 state-backed loans.
Christman’s worries reflect growing concerns among owners of small and medium-sized businesses about how they will cope with fast rising interest rates in the wake of the market turmoil sparked by the government’s controversial “mini” Budget.
The prospect of rising rates comes against a backdrop of near-record levels of SME debt, close to those reached in 2020 as companies borrowed to survive the Covid lockdowns.
UKFinance, the banking trade body, puts borrowing by small businesses at £204bn, significantly higher than the £167bn in 2019, before the pandemic struck. About half of that debt was loaned on floating rates, which means the cost of servicing it will rise sharply should interest rates more than double next year as many economists predict.
Much like the freeze in mortgage lending, triggered by the fall out from chancellor Kwasi Kwarteng’s proposed tax cuts, corporate lenders have started to re-price or withdraw products and readjust their risk profiles as credit committees take a more conservative approach.
The new administration of prime minister Liz Truss had hoped the tax cuts would help stimulate business investment and reboot the faltering economy but instead the “mini” Budget has only added to the financial pressures small businesses were already facing.
Andrew Taylor, commercial director for Running High Events, which organises the Bath half marathon, was forced to take out a £190,000 state-backed coronavirus business loan to cover overheads, staff and other costs after the event was cancelled during the pandemic.
He said the economic outlook had already hit sales and higher inflation had increased salary and supplier costs. “We have a clear plan to trade through this unsettled period, but the debts that the company was forced to take on during the pandemic will act as a drag on profitability for the next five years,” he said.
Bank loans and credit cards are used by about one-quarter of SMEs for financing purposes, according to a survey by the British Business Bank in 2021. About one in seven also used an overdraft.
Gemma Wright, managing director for Yorkshire at Reward Finance Group, which provides SME finance across the UK, said the feedback from brokers was that they had “never known a week like it” given the disruption in the market following Kwarteng’s “mini” Budget.
She said that some lenders had pulled products and amended existing offers as rates increased across the market. “Plenty of us are still lending but the mainstream banks are taking longer to make decisions. No one knows where rates are going to end up — it’s a pricing challenge for some lenders but funding is still available for SMEs.”
Ravi Anand, managing director of ThinCats, said there would be a large number of businesses paying double digit interest rates in 2023, with costs already higher for many.
ThinCats typically lends at about 7 per cent over the base rate, for example. This means companies seeking new loans are now being offered 9.25 per cent since recent rises.
Anand said there were companies struggling to get funding. “There is a whole switch of businesses you can’t fund, and especially those exposed to the consumer sector. We focus on larger and safer corporations.”
He predicted that banks would increasingly find it difficult to lend to some businesses because it was “too complex to price” given market volatility. “Good businesses will get funding but a bunch of stuff won’t happen.”
Stephen Pegge, managing director commercial finance at UKFinance, which represent lenders, said there were “plenty of options available for those firms looking for finance” and that lenders had the capacity “to support businesses looking to borrow”.
But he conceded that, after a strong August, business’ intentions to apply for finance were “as low as I have seen”. Use of invoice finance for working capital was rising, he added, and where smaller companies were borrowing the trend was “towards fixed, rather than floating, rates” to lock in loans before future increases.
He said rates were expected to rise more than previously forecast and could put pressure on the more exposed businesses. “Clearly there are some sectors that have borrowed more — such as retail and hospitality — that will be challenging if consumer confidence continues to fall.”
Kate Nicholls, head of lobby group UKHospitality, said the prospect of rising interest rates would leave many pubs, restaurants and hotels vulnerable as they had come out of the pandemic with higher borrowing than other parts of the economy.
She estimated debt stood at £12bn, or roughly twice the level of deposits, and said members asking about new loans were reporting being offered rates of more than 10 per cent. “Many cannot really raise finance at that rate,” she added.
