Interest rate rises to cost businesses extra £13.6bn in loan repayments

Further rises in interest rates over the next nine months are expected to cost businesses an extra £13.6bn a year in loan interest payments, research by ACP Altenburg Advisory shows.

Its analysis shows that UK businesses with floating rate loans are currently paying £17bn annually in interest payments on their £381.1bn of floating rate debt, at an average interest rate that currently stands at 4.5%.

Following the latest increase in the Bank of England base rate on 22nd of September to 2.25%, the current market expectation is that the SONIA rate (which usually tracks closely with the BoE base rate) will increase by a further c.350bps to c.5.75% within the next 9 months. This would increase the value of loan repayments by businesses to £30.6bn, an increase of £13.6bn.

However, Altenburg says that market expectations of future interest rate movements are typically only directionally accurate over a short-term horizon, and businesses need to be aware of the possibility that rates could rise even higher than the current market consensus depending on how economic conditions develop.

Dan Barrett, partner at Altenburg, warns that some businesses may not be fully prepared for such a significant increase in their borrowing costs, with some only stress testing their business model against a further 1-2% increase in interest rates after the recent rapid increases in the base rate, rather than at (or ideally) over the further 3.5% increase the market is currently forecasting.

Interest rate rises mean that many businesses could be at risk of breaching their lending agreements. This is because loan covenants often state that a business’s borrowing costs cannot exceed a certain percentage of its profits before interest and tax. If a business breaches these agreements, the lender could demand immediate repayment of a loan or a contribution of additional equity in order to “cure” the breach of the covenant by partially repaying the loan.

Dan Barrett said: “With interest rates expected to rise well into next year, many businesses could struggle to meet their interest and principal debt service obligations if they don’t start planning now.

“It’s more important than ever for businesses to understand how interest rates and inflation can affect their costs. If businesses think they are going to struggle to meet their loan repayments, they should consider options to reduce their payment obligations, which could include looking to refinance or at talking to their lenders about amending the term of their loans to reduce annual repayment obligations.”