British businesses struggle to source cash amid Bank of England interest rate hikes 

British businesses are struggling to source cash to fuel growth as lenders retrench from the credit market after the Bank of England’s 13 straight interest rate rises, new research out last night showed.

Just over nine in 10 mid-sized companies are running into roadblocks when trying to secure financing, prompting them to shelve expansion plans, according to consultancy BDO.

Greater difficulty in bagging capital among mid-sized firms is likely to have been driven by the Bank lifting borrowing costs sharply to tame inflation.

Last week, the Bank shocked the City by lifting rates 50 basis points to five per cent, their highest level since 2008. Markets had expected a smaller 25 basis point increase.

As a result, interest rates on loans throughout the UK economy have increased dramatically, causing banks to be more cautious about who they lend to for fear of borrowers being unable to meet their debt obligations.

Nearly a quarter of the 500 chiefs of mid-sized companies surveyed by BDO intend to make redundancies or scale back activity due to being unable to find funding.

Mid-sized businesses typically rely on credit to allow them to expand their business. Britain’s economy also relies on this bucket of companies for growth.

However, inflation, which is stuck at just below nine per cent, has forced the Bank to try and clamp down on business activity by tightening borrowing costs to rein in prices. 

“Despite staying resilient through an incredibly difficult time, tough challenges remain for mid-sized businesses, with access to capital becoming a critical issue,” Richard Austin, partner at BDO, said.

Mounting trepidation among banks is steering businesses to alternative sources of finance. 

Around one in three have turned to private equity investment to boost their finances, the most attractive form of alternative funding, followed by selling shares on public markets. Just over a quarter have tapped government support schemes, BDO said.

Regulators have been concerned about alternative banking providers, known as “shadow banks”, financing economic activity. These financiers are less tightly regulated than traditional high street banks.

Bank of England officials last week announced they are carrying out the first ever probe into the entire financial system to better understand how banks, private equity companies and pension funds would cope under intense strain in financial markets. The findings of the investigation will be published next year.