The Bank of England base rate forms part of the cost of borrowing for most UK SMEs. The thought of this increasing from the historically low rates seen since the 2008 financial crisis is horrifying some businesses. However, looking at the upcoming base rate in isolation is to ignore the other side of the equation, the significant tax breaks handed to UK SMEs by Kwasi Kwarteng in his ‘mini-budget’ last Friday.

"Many SME borrowers will be better off under the new regime."

Jim Shaw

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We’ve modelled the impact of a potential rise in the Bank of England base rate against the benefits afforded to businesses by the Chancellor’s two principal tax cuts: the reversal of the 1.25% increase in Employer National Insurance and the reversal of the planned increase in Corporation Tax from 19% to 25%. Our analysis shows that many SME borrowers will be better off under the new regime, even up to and above the touted 6.5% base rate that might be on the horizon.

The likelihood of base rates above 5.0% now seems highly probable as the US and UK continue to grapple with inflation. A look back at Bank of England base rates from 1975 to date puts such a number in context. Without the last 14 years, a 5.0% rate would be very much at the lower end of previous experience. It is not unreasonable that we end up here - and soon.

Of course, our analysis does not to take into account the increased Annual Investment Allowance limits and the potential reduction in pressures on wage inflation offered by the 1.25% reduction in Employees National Insurance, and the 1p reduction to the basic rate of tax. Should these be factored in, however, the benefits we have identified would actually be even greater for SMEs.

"A borrower needs to profitable."

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The majority of the tax benefit offsetting any rise in base rate comes from the 6% reduction in Corporation Tax. In order to access the offsetting benefit of the Corporation Tax reduction a borrower needs to profitable; this means that an increase in base rate does present a higher downside risk to borrowers when things don’t go to plan, but a business trading healthily should still be cash positive on a like for like basis following these changes.

Our analysis also takes into account a devaluation of sterling against the dollar of 4.5% (the fall in buying power of the UK’s currency from Thursday 22 September to Monday 26 September) and for a business buying 50% of its input goods in dollars, the news is still good for prospective borrowers.

An increase in base rate is anticipated to improve the value of sterling against the dollar. We aren’t speculating on the future value of the pound, however; any improvement in the strength of sterling, because of base rate or any other factor, will further support our analysis that the Chancellor really has provided a platform for growth for UK SMEs.

So, in a time when the markets are in panic and the media is revelling in doomsday predictions, some careful analysis shows that the ‘mini-budget’ has offered an opportunity to those UK SMEs looking to borrow to grow or acquire.

Of course, the circumstances of every business will differ. If you would like a copy of our analysis, please email hello@shawcorporatefinance.com with the subject heading ‘Base Rate Hike’.

Jim Shaw is CEO and Founder of Shaw & Co