SMEs gain only brief relief as borrowing costs ease but inflation climbs

Thu, Aug 21, 2025, 9:33 AM 2 min read

For the UK’s small and medium-sized enterprises (SMEs), July’s surprise inflation rise to 3.8 per cent is another reminder of how fragile the recovery remains. Costs are still rising faster than expected, with transport and food prices leading the surge, leaving many firms caught between higher outgoings and weaker consumer demand.

Mike Randall, chief executive of Simply Asset Finance, called the increase “unwelcome for many,” noting how it squeezes supply chains at a time when businesses are still absorbing April’s National Insurance hike. Douglas Grant, group chief executive of Manx Financial Group, warned that the uptick “will weigh heavily on SMEs” already grappling with expensive borrowing and constrained credit access.

These pressures have been building for some time. SMEs endured soaring input costs through the energy crisis, while customers reined in discretionary spending. Many businesses, particularly in retail, hospitality and logistics, now find themselves with narrowing profit margins just as the economy demands they reinvest to grow.

Some positive news came from Threadneedle Steet on 7 August though, the Bank of England cut its base rate from 4.25 per cent to 4 per cent – the lowest level since March 2023.

According to Trade Direct Insurance, this 25 basis point move should modestly ease loan repayments and encourage firms to revisit delayed investments. With challenger and specialist banks now accounting for 60 per cent of SME lending, the expectation is that competition could bring borrowing costs down from an average of 7.65 per cent to around 7.4 per cent.

It is a step in the right direction, but not a game-changer. Approval rates on SME loans still hover at 56 per cent, well below pre-pandemic levels. And while a small reduction in borrowing costs may offer some breathing room, the broader economic picture remains unsettled.

One looming risk lies beyond the UK’s borders. Recent US tariff measures still threaten to ripple through global supply chains in the coming weeks and months, unless averted. The US (TACO) President has been known to follow-up his strong stance on trade by softening his position. These moves, even if ultimately unrealised, could potentially feed into higher import prices and renewed inflationary pressure. If those effects filter into UK markets, SMEs could face a fresh round of cost increases just as they begin to feel the benefit of lower interest rates.

For now, SMEs find themselves in a holding pattern – waiting to see whether the modest relief from lower interest rates can outweigh the headwinds of stubborn inflation, fragile consumer confidence, and global economic volatility. The next few months will be decisive in determining whether small businesses can move from survival mode into a more sustainable recovery.