Normal lending still far away

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The Bank of England has raised UK interest rates for the first time in more than 10 years, but it’s far from being a sign of economic recovery

Nearly a decade ago the Bank of England cut UK interest rates to record low levels. Ever since, it has tried to persuade British businesses that the action was only an emergency short-term fix. Rather like the Big Bad Wolf, Bank governor Mark Carney regularly huffed and puffed on how a rate hike was imminent, but until this month his pronouncements were mostly hot air.

As it is, the quarter point hike in base rate from 0.25% to 0.50% announced on November 2, does no more than reverse a similar cut made 15 months earlier following a surprise result in the so-called ‘Brexit referendum.’ As many analysts noted, the belated increase had more to do with restoring the Bank’s credibility and demonstrating that it is serious about tackling inflation, which has risen from near-zero to 3% due to a weaker pound.

Yet however much members of the Bank’s monetary policy committee (MPC) would like to return to more normal lending conditions, they cannot move too far or too fast. While UK economic growth has been more resilient than expected since the decision to exit the European Union that only means recession has been averted. Companies are still uncertain about the future and business confidence is weak. That means any further rate hikes are likely to be modest and not that frequent.

To use an analogy regularly employed by the MPC in its pronouncements, the aim is not to slam the brakes on the economy but rather to ease off the accelerator – with low-to-negative rates and quantitative easing (QE) having pumped the gas pedal.

Attention now turns to chancellor Philip Hammond, who will deliver his Budget on November 22 and is being looked to for a few measures that will help small and medium-sized enterprises (SMEs).  Advance reports suggest that a planned increase in business rate tax of 3.9%, scheduled for April 2018, will be scrapped in favour of a lower figure.

Unfortunately, companies can’t expect much else from the government in the way of handouts as the government’s cupboard is pretty bare. A regime of austerity over nearly eight years has reduced but not eliminated the UK’s enormous budget deficit and what limited funds are available will be channelled towards improving Britain’s poor productivity rate.

Bear in mind also that the European Central Bank (ECB) has been making similar noises to the Bank of England in recent months. In March 2015, the ECB launched a massive QE programme to kick-start moribund Eurozone economies and stave off deflation, following up a year later by cutting rates to zero. Growth figures for even the region’s most stricken economies suggest that the medicine is working: recovery is now underway and the Bank can begin tapering off its efforts.

Slow progress

It’s against this unpromising backdrop that C2FO will shortly be releasing its latest Working Capital Outlook Survey, which has previously found that for SMEs in both the UK and the US, the cost of borrowing is generally higher than for their peers in Germany, France and Italy. It has also shown late payment practices to be widespread and C2FO is, along with three of the UK’s main banks, a supporter of the Prompt Payment Code (PPC), a voluntary set of guidelines that sets out a period of 30 days as appropriate for companies to settle their bills from suppliers.

This summer, the PPC celebrated its 2,000th signatory and reports suggest a demonstrable impact on improving the payment practices of larger companies. There remains much to be done though. The Federation of Small Businesses has estimated that one in three payments to SMEs become overdue and business owners typically spend more than a day each month chasing late payments. More than £26bn is owned to small businesses, and late payments is a direct cause of some 50,000 SMEs being forced out of business annually at a cost of £2.5bn to the UK economy.

If businesses in both the UK and Europe are to be weaned off the stimulants that have kept economic growth on the road over the past decade, it’s likely to prove a slow, unspectacular process. Companies will still be charged to hold deposits for some time to come, while the regulations imposed on banks that impede their ability to lend to SMEs are more likely to intensify than ease.

Fortunately for small businesses, necessity is the mother of invention and a number of innovative alternative financing options have been developed in recent years. Prominent among them is marketplace discounting, which has been pioneered by C2FO and is based on a collaborative relationship between a company and its suppliers. It’s also an option that frees them from reliance on the banks, the Bank of England and vulnerability to interest rate changes.

The growing number of suppliers who are using the C2FO solution, including those unable to access traditional financing sources, gain immediate access to lower cost capital before rate hikes take effect. They can name a lower rate for working capital than the cost of capital from other sources – for example a line of credit with a variable rate or factoring – both of which are subject to rate increases and also fees.