Latest interest rate reduction provides an early Christmas present for UK SMEs
The Bank of England has delivered an early Christmas gift for UK SMEs with the decision on 18 December to reduce the Base Rate to 3.75%. While some may argue this move comes later than expected, it makes sense in the current economic climate, given:
- Rising unemployment and a continuous fall in job vacancies
- Sticky inflation that has been slow to ease
- Spiralling national debt
- Persistent cost pressures on businesses since April, including increases in National Insurance contributions and the minimum wage
For many companies, particularly those that rely on borrowing to fund growth or maintain operations, this reduction offers welcome relief. Lower borrowing costs mean improved cash flow and greater flexibility, which could help businesses navigate challenging conditions and invest in future opportunities.
Looking ahead, the hope is that this marks the start of a downward trend in interest rates through 2026, creating a more supportive environment for SMEs and the wider economy.
Practical tips for SMEs
To make the most of this rate cut, consider the following actions:
- Review existing debt – Explore refinancing options to reduce interest costs and improve cash flow.
- Undertake covenant testing - Lower interest rates can change your financial ratios and covenant compliance. Review your loan agreements and test key covenants (such as interest cover, leverage ratios, and debt service coverage) to ensure you remain compliant and avoid unexpected breaches. This is especially important if you plan to refinance or take on additional borrowing.
- Plan for investment – Lower borrowing costs can make growth projects more viable; assess opportunities for expansion or technology upgrades.
- Strengthen cash flow forecasting – Use this period to model different scenarios and ensure resilience against future rate changes.
- Engage with your advisers – Professional guidance can help you structure borrowing and investments efficiently, balancing short-term relief with long-term strategy.
We’re here to help
Lower rates present an opportunity to ease financial pressure and plan for growth. Speak to our Debt Advisory team today to review your financing strategy and explore how you can take advantage of this change.
