Failure to cut interest rates is an opportunity missed, says FPB

10 July 2008

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Following the decision by the Bank of England to keep interest rates at 5%, the FPB is calling for the cost of borrowing to be cut in time for October's Pre-Budget Report, in order to stimulate the growth of small businesses struggling as a result of the credit crunch.

"While it is pleasing that the Bank of England's Monetary Policy Committee has ignored calls from some quarters for interest rates to be increased, maintaining the status quo like this can be seen as an opportunity missed," said the FPB's Finance Director, Nick Palin. "Lowering interest rates would have been a confidence booster and a clear signal to entrepreneurs that something pro-active is being done to support their businesses in the face of the global economic slowdown. In this environment, tackling threats to the growth of small businesses outweighs the risk of inflation."

Although rates have been successively cut since July 2007, they had increased steadily in the previous three years. Research carried out by the FPB in the first quarter of 2008 revealed that 59% of the small-business-owner respondents believed that spiralling interest rates had had a ‘negative' or ‘very negative' impact on investment. In addition, 74% with both overdrafts and loans reported an increase in lending rates during the previous six months.

The difficulties many small firms are experiencing in obtaining credit can be made even worse by the failure of some larger organisations to pay them on time – if at all – for goods and services, or when payment terms are forcibly changed mid-contract. A commitment to reducing interest rates in the run-up to the Budget would be an indication that these issues are being taken seriously.

The FPB's Senior Member Services Representative, Philip Moody, urged business-owners to keep a close eye on their cash flows of their businesses and encouraged them to seek alternatives to bank loans.

"Monitoring and maintaining a healthy cash flow is essential, but often one of the most difficult and time-consuming of tasks," he said. "Luckily, there is other support available to combat the effects of the current credit crisis and perennial problems such as late payment."

Mr Moody explained: "The FPB's partnership with Cattles Invoice Finance offers flexible funding solutions, with members capable of saving an average of £3,000 in the first year. Firms can access up to 85% of the value of an invoice within 24 hours of it being raised, which means they do not constantly have to chase payments. It also means that client relationships are not continually put under pressure."

The FPB's research in the first quarter of 2008 found that most of the smaller businesses surveyed were pessimistic about the prospects for future growth, with only 28% expecting sales to grow. Just 16% anticipated greater investment, and 12% an increase in employment.

With economic uncertainty a disincentive to investing in businesses, the FPB believes that a cut in interest rates would be a shot in the arm for small firms and the economy as a whole.

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Failure to cut interest rates is an opportunity missed, says FPB

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