The Bank of England has increased interest rates to 4%, the first hike in more than three years.
In what was a widely predicted decision, the move comes as an attempt to curb rising prices as a result of the Middle East war leading to increased petrol and diesel prices which is fueling inflation.
While the change could be a boost for savers, it will increase the cost of borrowing which means small businesses face increased charges for loans and credit cards.
What the interest rates increase means for small businesses
Business groups and experts share their reaction on what the interest rates increase means for small businesses:
Tina McKenzie, national chair, Federation of Small Businesses:
“Today’s rate rise is a sobering reminder that the fallout from global turmoil is landing squarely on the shoulders of Britain’s small businesses. For a small business owner juggling a business loan, commercial mortgage and mortgage on their own home, the impact of higher interest rates is felt both at work and around the kitchen table.
“With global energy and fuel prices driving inflation, today’s decision is not unexpected. But it will still make life harder for small firms, pushing up the cost of credit while leaving households with less money to spend.
“Two in five small business borrowers were already facing interest rates of 10 per cent or more last quarter, suggesting many lenders had anticipated a rise.
“On top of this, more than half (53%) of small firms cite fuel as their biggest rising cost, showing just how much pressure businesses are under before higher interest rates are factored in.
“Banks have a vital role to play in helping small firms through this period.
“That means making credit more accessible, particularly overdraft facilities, which have become harder to come by in recent years. Small businesses need the flexibility to manage their cash flow, not fewer options when money is already tight.
“Elsewhere, it’s worrying to see that there are 100,000 fewer SMEs in the UK economy than there were at the start of 2025. Entrepreneurship is essential to get the economy growing again.”
George Holmes, managing director, Aurora Capita:
“A rise to 4% is another unwelcome blow for small businesses that were hoping borrowing costs would finally start moving in the right direction.
“Many business owners have spent the past year carefully managing costs, delaying investment and trying to protect their cash flow. Higher interest rates make that balancing act even harder, particularly for businesses relying on overdrafts, variable-rate loans or short-term funding.
“The Bank of England is understandably concerned about inflation, but raising rates creates a difficult situation for smaller businesses. They’re already dealing with higher energy and supplier costs, and now the finance they might need to manage those pressures is becoming more expensive too.
“What worries me most is the impact on growth. A business might have the demand to expand, take on new staff or invest in equipment, but higher borrowing costs can make those decisions harder to justify.
“There’s also a knock-on effect from consumers. If households are spending more on mortgages and other borrowing, they have less disposable income, which puts further pressure on independent retailers, hospitality businesses and other consumer-facing businesses.
“Small business owners shouldn’t assume today’s increase will be the last, but equally, they shouldn’t put every investment decision on hold indefinitely. The priority should be understanding how higher repayments affect cash flow and making sure any finance they take on remains affordable if rates rise further.”
David Bharier, deputy director, British Chambers of Commerce:
“With inflation forecast to hit 5% next year, the Bank wanted to show it will act to stop price increases becoming entrenched.
“But the current rise in inflation is largely driven by energy costs from the conflict in Iran, not an overheating economy. Our data shows that now only 17% of firms are increasing investment. If there are signs of de-escalation in the months following the midterm elections, and energy prices steady, a rate rise may prove premature.
“So far, there is little sign of the wage-price spiral the Bank is looking to guard against. Unemployment is higher than in 2022, the labour market is looser, and our research shows AI adoption accelerating rapidly – with some of the deepest users more likely to expect headcount reductions.
“A rate rise is an insurance policy against the spiral. But after a Budget which gave businesses little incentive to invest, and with borrowing costs already high, it is economic growth that will pay the premium.
Rob Keown-Boyd, CEO, multifi:
“This is the first rate rise in more than three years and it’s another hit for SMEs, just a week after the Budget which did little to ease the cost of doing business. Small businesses were already under real pressure before today – inflation is at its highest level in almost a year and staff costs keep increasing, and now higher borrowing costs add to the cashflow crisis being experienced by firms up and down the country.
“Paying more to borrow is one thing, but for a lot of SMEs the real challenge is being able to access finance. Demand for working capital has been on the rise, with applications at multifi running around a third higher than this time last year. The worry now is that higher borrowing costs put businesses off getting finance when they need it most.
“Lenders need to make working capital as quick and easy to get as possible and help businesses keep their cashflow ticking over while costs are increasing. If firms do end up going without the finance they need, it’ll be hiring and investment that get put on hold first.”
Theo Chatha, group chief financial Officer and managing director of specialist Finance, Bibby Financial Services:
“Today’s interest rate rise is another blow for SMEs already feeling the squeeze, particularly after a disappointing Budget. Over half (52%) of SMEs told us lower interest rates would make them more confident to invest, yet today we’ve seen the opposite happen. This rate rise will increase borrowing costs, put investment plans at risk, and leave the UK’s small businesses with even shallower pockets.
“For exporters, the pressure is even greater. SMEs trading internationally often wait months to be paid by overseas buyers, so higher rates make bridging that gap more expensive. Our International Trade Report found that two-thirds (67%) of SME exporters already say that international trading conditions have increased pressure on their cashflow over the past year, and 29% are struggling with currency volatility.
“SMEs haven’t lost their ambition to grow, and there are practical steps they can take to keep that growth on track. Protecting cashflow is critical – business leaders should assess their funding mix, and if they trade overseas, treat FX management as essential rather than optional. Those who act now to put the right strategies in place will be in the best position to keep their growth on track.”
Alpesh Paleja, deputy chief economist, CBI:
“The Monetary Policy Committee has raised interest rates for the first time in over three years as its patience with the global energy shock finally runs out. With inflation set to exceed 4% early next year, the Committee is looking to prevent higher energy costs from feeding into more persistent domestic price pressures – particularly through wage growth and household expectations of inflation. Resilient economic growth and signs of stabilisation in the labour market have also added to inflation risks.
“The question now is where the Committee goes from here. Persistently high inflation means another rate rise cannot be ruled out. That could prove challenging with interest rates already weighing on economic activity, while tighter financial conditions are doing some of the Bank’s work for it.
“Either way, households and businesses face higher borrowing costs in the near term. That is a bitter pill to swallow, but one the MPC will see as necessary to prevent a more prolonged inflation shock and lasting damage to living standards.”
Katie Horne, bank partnerships manager, Flagstone:
“Banks have been building an anticipated hike into the rates they offer on fixed term savings accounts for several months now. A single 0.25% base rate increase isn’t expected to move fixed rates much further.
“Any base rate change serves as a handy reminder to business savers that ‘setting and forgetting’ their cash reserves doesn’t yield the best results. Instead, companies should review their accounts regularly to ensure they’re getting the best value from their reserves as market mood and rates move.
“For companies, a rate rise makes idle cash more expensive to ignore. Borrowing is already costly. The average new business loan rate was 6.55% in September, and a hike will likely push it higher before long.”
