The Bank-of-England Pauses Interest Rates - What it Means for UK Small Businesses

The Bank of England building

In their latest announcement, which was today at 12:00pm, Thursday September 21st, 2023, the Bank-of-England (BoE) declared that they will pause raising interest rates. Meaning that rates will remain at the same figure of 5.25%

This is contrary to the expectations of roughly 50% of economists who forecast that rates would rise, despite an unexpected drop in inflation to 6.7% in August. 

But thankfully, in what will come as a relief to businesses and individuals operating in the UK economy, the BoE has relented in its push to drive inflation back down to 2%. And left the cost of borrowing at its current level, after 14 previous consecutive hikes in interest rates.

A number of key voices within economic affairs had previously called for rates not to be raised any higher. Figures like Suren Thiru, the economics director for chartered accountant group ICAEW, warned that,

“Although interest rates will probably rise on Thursday, additional tightening unnecessarily risks aggravating the financial struggles facing households and businesses, given the long time lag between rate hikes and their impact on the real economy.”

And Martin McTague, national chairman of the FSB said,

‘’Leaving rates high for longer than needed will devastate the chances of an economic recovery.”

Prior to the announcement, expectations amongst financial analysts were divided. According to the FOREX news site, markets had optimistically priced in a 57% likelihood of the Bank of England pausing its rate hike, a stark increase from the previous 20% estimate prior to the release of UK inflation figures.

This was based on the fact that last month the annual inflation rate in the UK declined to 6.7%, influenced by more moderate increases in food costs and a decrease in expenses related to hotels and air travel.

However despite today’s pause, interest rates still remain very close to their highest levels in recent history. And there are some serious challenges facing UK small businesses and startup companies.

How will interest rates affect UK Small Business?

Elevated interest rates translate into more expensive borrowing. Since small enterprises frequently rely on external funding for expansion and investment, the augmented cost of securing loans hampers their ability to accumulate the necessary capital for success.

Moreover, the squeeze from inflation and climbing interest rates reduces consumers' available spending money. As a result, customer expenditure declines, putting further strain on a business's income stream, on top of already escalating costs for inventory, materials, and shipping.

Here are three of the main ways in which the current level of high interest rates affect small businesses. Along with actions you can take to protect, or soften the impact to, your commercial finances. 


If you operate a brick-and-mortar store or eatery, you've likely observed the variable customer counts impacting your revenue stream. With fewer individuals commuting to work, weekday foot traffic in urban areas has notably diminished, resulting in fewer patrons for shopping, coffee purchases, or dining out.

Additionally, the turbulence in the commercial property sector could be influencing your business's recurring expenses. If you own the space where your business is located, you'll find that climbing interest rates are causing your mortgage payments to escalate at an unsustainable rate.

Conversely, if you're a tenant in your business location, it's probable that your landlord is transferring their own increased mortgage costs to you, manifesting as a hike in your monthly rent.

If your business holds debt that's collateralised by your commercial real estate, pondering a mortgage refinance could be beneficial. This action could liberate some cash flow, alleviating financial strain and potentially enabling you to channel resources into growth opportunities.

Should your fixed-rate mortgage be nearing its end, it's prudent to investigate other options in the market. The standard variable rate (SVR) you'll likely switch to post-fixed rate is seldom the most competitive offering available.

You can seek further advice on this from Crunch’s mortgage experts who help self-employed contractors and small business owners find effective mortgage solutions. 

The Pound: 

As the BoE has left interest rates the same it has indicated that it’s content to observe the emerging situation with inflation and the economy before it determines its next move on rate increases. 

This could enable the market to advance its anticipation for a rate reduction in 2024, a time frame with considerable room for shifts. Which will likely devalue the Pound against the Dollar and Euro.

For companies generating revenue in foreign currencies, depreciation of the pound sterling—can have an impact on profitability. To shield against the uncertainty brought about by currency exchange fluctuations, firms can utilise forward contracts when dealing with transactions in foreign currencies.

As these serve as a safeguard against variations in currency exchange rates, which can significantly impact your budget. And such a contract can shield your profit margin, enabling more precise forecasting of cash flow and revenue over a given period.

Financing and Funding

Escalating interest rates can lead to elevated interest payments for business owners who have loans or credit cards, affecting their cash liquidity. These enlarged expenses can prolong the time-frame needed to settle loans, potentially disrupting financial goals and compelling entrepreneurs to postpone expansion strategies.

Furthermore, as funding becomes costlier because of elevated interest rates, businesses may struggle to secure financial backing. Financial institutions might grow more cautious about extending credit to new ventures, and obtaining short-term capital for handling rising costs or facilitating business growth can become increasingly difficult.

Whilst it's undeniable that climbing interest rates can create hurdles for start-ups seeking financial support, there are a few options to ease the pressure.

If you're considering applying for a loan, or refinancing an existing one, opting for a one with a fixed interest rate could provide some stability during tough periods. Securing a set rate for an extended duration allows for predictable budgeting for repayments, safeguarding you from the impact of further interest rate hikes. Or even worse, in the case of a bank cancelling or reducing your overdraft. 

Additionally, you could explore non-traditional lending options, as some alternative lenders have more lenient qualification criteria compared to conventional banks. Some financial institutions even offer versatile credit lines that can be utilised for paying invoices or other expenses, with the option to repay over a span of months.

There may well be more of these diverse lending products available if the conditions for SMEs remain challenging.

In summary, the Bank of England's decision to pause interest rate hikes offers a temporary respite to UK small businesses already grappling with numerous financial challenges. While the static 5.25% rate doesn't solve underlying issues, it at least avoids adding fuel to the fire. Businesses still have to navigate a terrain of high borrowing costs, constrained consumer spending, and fluctuating currency values. 

However, this pause offers an opportunity for firms to re-evaluate their financial strategies. Whether it's considering mortgage refinancing, exploring fixed-rate business loans, or using financial instruments like forward contracts to hedge against currency risks, adaptability is key. As we look ahead, understanding and mitigating the impact of these economic variables will be crucial for small businesses aiming for sustainable growth.

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James Waller
Content Specialist
Updated on
September 21, 2023

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