Business borrowing – should you wait for a drop in interest rates?

When is the right time for a business to borrow? It is a question the Funding team at Kreston Reeves is regularly asked, and it is not always an easy question to answer. 

Businesses have, until recently, been able to access relatively easy and affordable borrowing however the base rate has climbed in recent years, currently sitting at 5%. It is this rate that determines the interest charged to other banks and lenders when they borrow money from the central bank, affecting mortgage and savings rates.  

The base rate was cut from 5.25% to 5% on 1 August 2024, which is the first base rate cut in over four years. Before this, there had been no reduction in the base rate since March 2020, when the rate was reduced to a historic low of 0.1%.  

Whilst the drop in inflation has begun to filter through into interest rates with this first base rate cut, there is some way to go before the cost of borrowing returns to what many people would deem to be a ‘normal level’.  

It leaves businesses asking whether they should borrow now or wait and see if the cost of borrowing falls in line with inflation. 

Borrowing for growth

Borrowing might at first be considered a high cost to the business, but considering borrowing through the lens of cost alone would be a mistake. Borrowing must be viewed through the lens of business opportunity.  

Businesses should always ask why they are borrowing and what will the cash injection be used for. 

The most compelling reason for borrowing now is to fund an opportunity for growth. Where a business has identified a strategic or tactical opportunity that might give it a competitive edge, borrowing might be the most sensible and practical way to unlock growth. 

Lenders are willing to lend to businesses with a strong business plan that can demonstrate growth and opportunity. 

Of course, the cost of borrowing needs to be factored into those plans. And those plans will need to include the opportunity cost of acting now against delaying in the hope of falling interest rates. Businesses should ask whether opportunity value outweighs the opportunity cost. 

Businesses need also to consider corporation tax. Interest on borrowing is tax deductible, reducing the amount of corporation tax paid. Whilst corporation tax rates are not guaranteed to change, the new Labour government have said in their manifesto promises that they will leave headline tax rates as they currently stand. Utilising the higher corporation tax now might make good financial sense. 

 Finally, borrowing will help a business build a positive credit score, which will make it potentially easier to access future borrowing should it be needed. Businesses with little or no credit scores can find it tough to access affordable borrowing. 

Scenario planning

Businesses will not need reminding that the economy remains in a fragile state with widespread domestic and global uncertainty. Businesses will naturally remain cautious, not wanting to saddle themselves with unaffordable debt should trading conditions worsen. 

Additionally, lenders will almost always seek personal guarantees and founders and directors need to ask whether they are willing to put personal assets at risk.  

To fully understand the lending landscape and the impact and opportunity borrowing might have, businesses should undertake detailed scenario planning exercises. And it is here that the Kreston Reeves dedicated funding team can help. 

We work with businesses of all shapes and sizes and can support those businesses in exploring different scenarios and the financial impact that might have. We also work with a variety of lenders and can help businesses unlock the right funding option for every opportunity. Contact us today.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.