The EU referendum result may have prompted anxiety among SMEs, but falling interest rates could be a reason to accelerate your investment plans.
Small and medium-sized enterprises (SMEs) not directly impacted by the UK’s decision to vote for Brexit are still likely to feel the effects of the referendum result. We have already seen the Bank of England’s Monetary Policy Committee cut interest rates to a record low of 0.25 per cent and it has promised further monetary policy action as and when it is needed.
Ultra-low interest rates – the UK is now closing in on the negative rates favoured by the European Central Bank and the Bank of Japan – will have some perverse effects, which SMEs will need to be wary of in the months and years ahead. Many firms are already nervous about the future; 54 per cent of SMEs think the UK’s economy could fall back into recession, or that it already is, according to the latest Close Brothers Business Barometer. Ultra-low rates will be part of the challenges with which SMEs must contend.
Banks have already begun to talk about imposing charges on SMEs with funds on deposit. That is, they would charge interest when SMEs have cash in the bank, rather than paying them interest on their money. The Federation of Small Businesses has urged the banking sector to keep SMEs informed as they move towards such levies, but firms tempted to maintain large cash balances in reserve as protection against economic uncertainty may find themselves adversely affected.
Meanwhile, on the other side of the balance sheet, some analysts expect leading banks to launch a price war as they seek to attract more customers – a possible response to the lower margins that the interest rate cut will mean. That competition is likely to be focused primarily on consumer lending, but a number of banks see smaller businesses as an opportunity to protect their profitability.
The combination of falling interest rates – or even charges – on cash balances and cheaper credit could be seen as an argument for businesses ramping up their investment plans over the months ahead, either to get underperforming cash off their balance sheets or to take advantage of affordable finance options.
In fact, there is already some evidence that this is what many SMEs are planning. The latest data from the British Chambers of Commerce, based on SMEs’ views in the second quarter of the year, suggests around a fifth of manufacturers intend to increase investment over the year ahead, while close to a quarter of service sector companies plan the same. Those figures are down on the BCC’s first quarter figures, amid post-Brexit economic anxiety, but still relatively robust.
Close Brothers’ own figures also suggest sizeable numbers of SMEs are still planning for business investment over the next 12 months. Some 34 per cent of firms in the latest Business Barometer say they intend to seek funding for investment over the year ahead.
However, it’s important that SMEs consider all their options for funding, including alternative finance. While some banks may be preparing to loosen the purse strings for their SME customers, many businesses will find other funding sources, including invoice and asset finance, better suited to their needs, offering greater flexibility and a more tailored solution. That will be important given the uncertain economic outlook.