Base Rate Cut to 4% – What It Means for UK Business Loans & SME Funding

Base Rate Cut to 4% – What It Means for UK Business Loans & SME Funding

On the 7th August 2025, the Bank of England (BoE) cut UK interest rates from 4.25% to 4%, the lowest level since March 2023.

The BoE interest rate can affect mortgage rates and interest rates on savings, as well as the speed at which prices change and how the jobs market performs. Below, we explore what that means for SMEs and their access to business finance.

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The New Base Rate of 4.00% – What Does it Mean for Businesses?

The Bank of England has reduced the base rate to 4.00%, lowering the cost of borrowing and offering potential relief to businesses across the UK. The second cut since May this year, the decision will offer some comfort to small business owners who have had a tricky year with rising operational costs and escalating global trade tensions. Seeking to balance inflation control with economic growth in a tumultuous climate, policymakers are attempting to bring some stability.

A lower base rate could mean a few things, including:

• Reduced borrowing costs with commercial banks offering lower interest rates on loans
• Lenders may adjust their borrowing costs to retain their competitive edge over traditional institutions
• Businesses may take advantage of calmer waters and more affordable borrowing, investing in recruitment and expansion
• Said businesses may also be reluctant to make any moves ahead of the autumn budget announcement, after last year saw a spike in business costs

All of the above, however, will no doubt be impacted by any potential ‘trade war’ brought on by Trump’s recent tariffs.

How Does the Bank of England Impact Business Loan Interest Rates?

Known as the ‘most important interest rate in the UK,’ the BoE base rate plays a vital role in the economy, affecting both individuals and businesses. In simple terms, that interest rate figure represents the cost of borrowing money and what return you can expect to get on any savings you have.

When borrowing, you’ll always pay a fee for doing so, which is why cash is king. However, it would likely be an impossibility for businesses to always use their own liquid cash. Not only would this tap into precious reserves, it would also likely restrict cash flow and disrupt day-to-day operations. It’s incredibly common for businesses to seek assistance from elsewhere – in 2023, almost half of all UK businesses used funding from external sources.

Who decides what the BoE base rate is?

The BoE base rate is set by the Monetary Policy Committee, and is primarily used to keep inflation around the government’s 2% target. As of June 2025, inflation was at 3.6% following a volatile period of fluctuations, which is why the BoE base rate has not been drastically cut. When inflation is high, the BoE base rate is also increased in order to curb spending and encourage savers.

When inflation drops, the base rate is also dropped to ‘kickstart’ the economy by inviting spending and investment, for example, during COVID, when 0.25% marked the lowest rate in 350 years. However, just two years later and inflation rose to 11% in October 2022 – the highest in 40 years – which saw the base rate double in just a couple of months.

For businesses, interest rates directly affect cash flow and investment decisions. High rates can increase fixed costs like wages and supplies while reducing consumer spending, making it harder to remain competitive (or even afloat).

How Consumer Spending Affects Business Revenue

The UK’s base rate has a direct effect on consumer behaviour, which then impacts how much they are willing to spend on goods and services provided by businesses. For example, when the interest rate gets hiked up, a homeowner’s mortgage could double or even triple, reducing their ability to spend money elsewhere, and so, in an extreme example, stifling the economy and creating a challenging climate for business owners.

In a real-world scenario, let’s consider a homeowner paying their mortgage. When their mortgage payments increase, they are likely to significantly reduce their day-to-day spending, which could include:

• A daily coffee from an independent coffee shop
• Weekly meals out at a local restaurant
• Subscription services
• Fresh groceries from bakeries and delis
• Taxis
• Home maintenance, like window cleaning or gardening

When you consider the different individual businesses and SMEs behind those spending habits, it’s not hard to see how the base rate has a domino effect on business revenue. This knock-on effect also trickles down from homeowners to those renting accommodation, too. Landlords (where possible) will raise rent to cover the mortgage payments on their properties, directly impacting occupants and placing financial strain on those throughout the rental market, too.

However, when the bass rate is dropped, the opposite is also true. Things become more affordable – including mortgages and rent – giving the average consumer more disposable income to spend with businesses of all shapes and sizes. Those with their money in savings accounts may also be less incentivised to keep their money tied up if it is not making good returns, unlocking another area of the consumer market. However, with more demand comes a rise in inflation, which can threaten to begin the cycle all over again. In a nutshell, that’s why it is important to maintain a reasonable balance.

Despite this recent cut down to 4%, businesses across the UK are no doubt wary of ongoing economic unpredictability. In light of the UK’s sluggish growth, political uncertainty and trade restrictions emerging from the US are all pivotal factors.

Access to Funding for UK SMEs

Earlier in 2025, it was revealed by the British Chambers of Commerce Insights Unit that a large number of SMEs felt that getting access to funding had become increasingly difficult.

In response to this widespread concern, the British Government unveiled its Small Business Plan, which aims to create a culture of support for British SMEs and businesses based on the high street, tackling things like late payments, modernising the taxation system and reducing regulatory burdens.

Right now, even in the wake of this optimistic rate cut and the government’s wider Small Business Plan, businesses will need to weigh up whether this is the right moment to invest, or whether uncertainty still warrants a more cautious approach.

Easy Access to Superfast Business Funding

At White Oak UK, our dedicated team of business finance experts are on hand to help you secure funding specific to your needs. We have a range of business finance products designed for SMEs across all sectors. Whether you need help with your VAT bill or you’ve spotted an exciting window of opportunity that you want to secure backing for, we can get the cash deposited into your account within a matter of hours.

Get in touch with one of our friendly experts by calling 0333 014 9000 or check your eligibility online.

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