What does the Bank of England rate cut mean for small businesses?

Small business owners will have been watching the Bank of England closely to see whether they cut interest rates or not, and earlier this month there was finally some positive news. 

At their meeting on 6th February, the Monetary Policy Committee voted to cut the Base Rate by 0.25% to 4.5% – the lowest level for more than 18 months.

This cut came alongside a downgraded 2025 growth forecast, with the Bank of England now expecting the UK economy to grow by just 0.75% this year. In November 2024, it had forecast growth of 1.5%.

So, what does the Bank of England Base Rate cut mean for small business owners? We look at the theoretical positive impact of such a cut, but it does come with a caveat in the current economic climate. 

Lower borrowing costs 

Put simply, lower interest rates mean a reduction in the cost of borrowing. For many small business owners, they may find a new business loan is cheaper than they previously thought. For those with existing debt, such as mortgages or credit cards, monthly repayments may reduce.

A reduction in monthly interest repayments could free up cash flow, giving businesses some much-needed breathing space to help with day-to-day operations.

This will be a relief for those business owners who are currently worrying about how they’re going to deal with the upcoming changes to staffing costs and business rates that come into effect from April.

Increased consumer spending

Consumers should benefit from a lower interest rate, with less of their income going towards mortgage repayments and other forms of debt. Lower monthly household costs should, in theory, lead to more cash in people’s pockets to spend with small businesses.  

Increased investment

When borrowing costs are lower, loans are cheaper, and so investment becomes more affordable. Business owners can take advantage of lower borrowing costs to fund growth plans.

Potential economic growth

Lower interest rates are generally good for business. With cheaper loans, more businesses are incentivised to borrow to expand. At the same time, consumers have more disposable income to spend – both of which, in theory, should stimulate the economy. 

What does this mean in the current economic climate?

In the current economic climate, all of the above comes with a caveat.

At their February meeting, the Bank of England forecast inflation to rise, reaching a peak of 3.7% in the summer. This, alongside the Bank’s prediction of much lower growth, means both business owners and consumers are likely to be cautious.

Whether businesses will take out cheaper loans to fund growth, or just use the improved cash flow to navigate the uncertain waters ahead remains to be seen. 

How much does a Funding Circle loan cost?

A business loan could be more affordable than you think. Use our online calculator to see what your monthly repayments could be. 

11/02/25: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.