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Small firms are facing difficulty in raising new finance due to the costs associated with doing so, according to research from the Federation of Small Businesses (FSB).

These findings were unveiled ahead of the Bank of England’s decision to raise the base rate to 0.75 per cent.

The research reveals that only 13 per cent of small businesses are making applications for new finance in Q3 2018.

New credit has been described as ‘unaffordable’ by 42 per cent of small firms in Q3 2018, with less than 24 per cent of firms disagreeing.

This isn’t entirely surprising; less than a third of small firms are being offered interest rates of under four per cent, down considerably from the four in ten (39 per cent) recorded in Q3 2017. Meanwhile, one in three (35 per cent) are being offered steeper interest rates of seven per cent or more on new lines of credit in Q3 2018, up from 24 per cent at this time last year.

Even though interest rates are preventing one in three small firms from affording new credit, 38 per cent of these businesses are still applying for bank loans. A substantial 30 per cent are also seeking asset-based finance, while 16 per cent are approaching crowdfunding platforms and nine per cent peer-to-peer platforms.

Future rate rises must be ‘gradual’

FSB National Chairman Mike Cherry says that a lot of small firms had been preparing for higher interest rates. However, with borrowing costs for small firms already high, it’s critical that any future rate rises are carefully considered and gradual,

‘A good proportion of small businesses welcomed the prospect of higher rates taking some heat out of price increases. Consumer inflation has been consistently above two per cent for months now with input costs, especially fuel, also on the rise.

‘One big concern is the impact of rising rates on consumer demand. For the first time in 30 years, we have an environment where household outgoings are bigger than household incomes,’ he says.

‘Even a slight increase in consumer credit and mortgage costs is going to have a significant impact on the ability of shoppers, including small business owners, to spend on our struggling high streets.’

He adds that too many firms are reluctant to borrow and realise their full growth potential and those that do are too reliant on traditional debt products.

See also: 6 Business Funding Options for Growth