Interest rate optimism means now is the time to raise debt

Owen Malton

With rates set to fall, firms should be preparing to raise funds, says Owen Malton of DSW Debt Advisory

Despite continuing inflation and worldwide geopolitical tensions, and with interest rates at a 15-year high, there is a ray of hope on the horizon. Most UK economists agree that rates have peaked and will soon start to fall from the current level of 5.25%. The first cut is expected later this year, with some predicting they will drop to 4% next year – a level once considered the norm. 

The high cost of borrowing over the past year or so has affected businesses’ investment plans and growth. While rates may never return to the pre-pandemic lows, a fall to more reasonable levels will change the dynamics and make it worthwhile for them to start investing again – buying new machinery, making acquisitions and actively pursuing growth.

With consumer confidence recovering, a reduction in rates will boost confidence further, and as businesses look to raise new debt funding, financial institutions will be faced with increased requests. Therefore, companies considering borrowing money should start planning now to allow sufficient time to research the options and put together a compelling case. As three to five-year loan facilities are priced on market expectations of future rates, it is also good to be applying at a time when rates are widely expected to fall.

Here are six ways to secure the right deal on the best possible terms:

1. Present your case carefully

Although there is likely to be plenty of debt finance available, lenders will remain cautious and will continue to scrutinise applications carefully. Therefore, companies may need to be realistic in their financial forecasts and provide supporting evidence, as funders will apply rigorous sensitivity scenarios.

Consider how best to present your case and anticipate the questions lenders may ask. Focus on the factors that will give them reassurance – such as the strength of the balance sheet, quality of earnings, diverse income streams, the number of long-term contracts and repeat orders or anything else that demonstrates the recurring nature of revenues and the strength of customer relationships.

  2. Consider what security you can provide

Generally, the more security, the more comfort it provides for the bank, which means it won’t have to set aside the same amount of capital; therefore, this saving is reflected in the cost of the loan. Consider what assets you have that could be used such as property, debtors and stock, as well as plant and machinery.

3. Choose the right debt product 

There are many different debt instruments, and what is right for one business may not be right for another. There are numerous factors to consider; for example, the launch of a new product could have working capital implications, or longer-term funding may be required following investment in plant.   

4. Compare different providers

Gone are the days when your friendly high street bank manager was a one-stop shop for all your needs. In addition to the high street banks, there is a plethora of different providers, including around 175 different debt funds plus challenger banks.  An experienced debt adviser who understands your business and requirements will be able to access a wide market and help you communicate with funders to obtain the best deal.

5. Allow plenty of headroom

Ensure that any financial package contains sufficient headroom to allow for the unexpected – for example, project delays, cost over-runs or a drop in customer demand. Also, think about the impact on working capital in an ongoing inflationary environment.

6. Consider hedging

While rates are likely to have peaked for the time being, with any loan agreement, it is advisable to consider the risk of future rises and whether to use hedging to manage that risk.