Just 11% of business lending is now fixed-rate

By Marc Bajer, chief executive officer at Hadrian's Wall Capital

Just 11% of the £416bn in total stock of loans to businesses are now being provided on a fixed rate, leaving businesses with huge exposure to rising interest rates, says Hadrian’s Wall Capital, the London-based specialist debt adviser.

The proportion of loans provided on a fixed rate has dropped from 18% over the last two years alone as banks prepared for interest rate rises and de-risked their loan books. Hadrian’s Wall Capital says that this has left businesses to deal with significant uncertainty over their cost of finance, and unable to plan corporate finance activity and investment over the coming years.

The firm says that fixed-rate loans are now increasingly difficult for businesses to obtain – especially small and medium enterprises. As a result, SMEs risk seeing repayments on their loans jump substantially as interest rates rise.

A recent study by Hadrian’s Wall Capital found that the expected further rise in interest rates of 0.25% in the coming months will cost British SMEs another £355m in interest payments in the first year alone.

Hadrian’s Wall Capital says the consequences of both the credit crisis and the swaps mis-selling scandal has meant that SMEs are now not only extremely wary of using swap products, but would also have great difficulty in obtaining approval from any institution in order to fix the interest rate on their loans using swaps. This has removed another layer of protection from rate rises for businesses.

With interest rates now on the rise, there is a risk that SME growth planning and corporate finance activity could be shelved for the present, as businesses choose to wait for less uncertainty over the costs of floating rate debt.

Hadrian’s Wall Capital says it is important to continuously revitalise UK business by giving them uninterrupted access to debt refinancing, MBOs and MBIs. Fixed-rate lending for such corporate finance activities can help to reduce the risk of rising interest rates to these SMEs.

The growing shortage of fixed-rate bank lending to SMEs has led Hadrian’s Wall Secured Investments Limited (HWSIL) to focus on providing long-term, fixed-rate, non-callable loans to SMEs, giving them intermediate to long-term certainty over their cost of funding. This enables them to undertake corporate finance transactions and plan long-term programmes of investment in their businesses.

Hadrian’s Wall Capital is the investment adviser to HWSIL, an LSE Main Market-listed fund. HWSIL specialises in providing loans which:

  • cannot easily be recalled by the lender, giving SMEs certainty over their funding
  • are at a genuine fixed rate over the long term, unlike the majority of loans offered by banks
  • have very competitive fees
  • can reach a decision in principle for providing finance in short order.

Marc Bajer, CEO at Hadrian’s Wall Capital, said: “Now is the time for small businesses to lock in to fixed-rate debt, before interest rates rise again.

“However, fixed-rate loans are now virtually unavailable from banks, and many SMEs are reliant on floating rate debt. Any jump in interest rates could see small businesses burned by their reliance on floating rate loans.

“Corporate finance advisers should also consider fixed-rate debt when it comes to their corporate finance activities, so as to reduce the threat – to them and to their clients – of rising interest rates.

“When interest rates rise, small businesses are likely to suffer financial damage – a rise in the base rate to just 1.5% would cost UK small business billions.”