What impact will rising interest rates have on business borrowing?
Rising interest rates are causing concern for business owners with borrowing and for those looking to borrow. Just as homeowners are acting early to secure the best possible mortgage rates, business owners too need to get on to the front foot with current and future borrowing requirements.
Businesses that require borrowing need to understand how rising interest rates will impact their ability to secure borrowing, how lenders are responding, and what impact default rate changes may have.
It may sound obvious, but business owners should always be aware of their current borrowing, when credit facilities expire, and what covenants are linked to that borrowing. Borrowing rates are already increasing in anticipation of further Bank of England base rate rises and if further borrowing is likely to be required, acting early to gain certainty may be advisable.
At the same time, the need to understand borrowing covenants and the headroom in those covenants is vital. It should be remembered that a covenant’s purpose is to protect both the borrower and lender as they should be set at a level that allows variance in the business performance over the term of the facility.
If forecasts suggest that those covenants might be broken, perhaps because of the Covid pandemic, increased overheads, or exchange rate fluctuations, business owners should take proactive steps and explain to lenders how the position will be resolved. That may require the renegotiation of current borrowing or seeking a capital repayment holiday.
Lenders have always stress-tested borrowers’ ability to cope with an increase in the base rate, but with forecasts of further base rate rises well above lenders' expectations, any future increases are likely to force a rethink of those stress tests and the rates applied. That may well lead to a tightening of available credit, emphasising the need for businesses to look ahead and plan for future borrowing requirements.
Despite rising interest rates and market uncertainty, lenders are still open for business. They will expect to see a well-structured proposal backed up by balanced forecasts that set out best and worst-case scenarios. However, do expect lenders to seek a personal guarantee and possibly a charge over personal assets – something that does not always sit comfortably with business owners.
Bounce Back Loans and CBILS
Many businesses will have a Bounce Back Loan with a repayment term of six years. There is a right via the Government’s Pay As You Grow (PAYG) scheme to extend the loan term from six to 10 years. With Bounce Back Loan rates fixed at 2.5%, compared to borrowing rates of up to 10%, this continues to look good value.
Borrowers will of course pay more in interest by extending the term, but monthly repayments could fall by as much as 50% providing a boost to cash flow. Most lenders have an online platform you can use to apply for a loan term extension.
The Coronavirus Business Interruption Loan Scheme, or CBILS, also offer the ability to extend the loan term from six to 10 years but at the discretion of the lender (albeit with the full support of the Government and the British Business Bank). This extension is available if the borrower is ‘in difficulty and the lender believes that the extension will help the borrower repay the loan’. Businesses that wish to extend the loan term to ease cash flow will need to factor in additional interest paid.
It should also be remembered that if the business trades well in future years, there is the ability to make one-off additional repayments without penalty to reduce Bounce Back and CBIL borrowing.
Businesses are reminded to take independent advice before borrowing or making changes to their existing borrowing.