Categories
Base Rate Cut to 3.75%: The Impact on Businesses [December 2025]
The Bank of England has cut the base rate to 3.75%, and we explain what this means for your business.
Earlier this year, the Bank of England reduced the base rate to 4.00% in August, following a period of elevated interest rates aimed at tackling inflation. After holding steady in September, policymakers have now moved to lower the rate again, signalling a cautious shift towards supporting economic growth amid continued global uncertainty.
With the base rate now at 3.75%, businesses can expect lower borrowing costs as lenders gradually pass on reductions in interest rates on loans and finance facilities. This could support investment in expansion, equipment, and recruitment, though the benefits may be moderated by cost pressures introduced in the Autumn Budget 2025. Measures such as frozen income tax and NI thresholds, a new salary sacrifice cap, and changes to VAT and corporation tax create additional financial pressures for many companies.
At the same time, the Budget also introduces targeted support and growth opportunities, including permanent Retail, Hospitality & Leisure (RHL) business rates relief, incentives for EV forecourts, enhanced investment allowances, and expanded venture capital schemes. Navigating this mixed environment requires careful financial planning, balancing potential cost savings from lower interest rates with increased operational and compliance costs.
The ultimate impact of the base rate cut will depend on how individual lenders adjust their rates, but alongside the Budget measures, it provides a framework for businesses to reassess borrowing, investment, and cash flow strategies in the year ahead.
How Does the Bank of England Impact Business Loan Interest Rates?
Interest rates play a vital role in the economy, affecting both individuals and businesses. They represent the cost of borrowing money and the return on savings, typically expressed as an annual percentage of the total amount.
This is why it’s always cheaper to use existing capital rather than borrowing. However, it's not always possible (or practical) for businesses to rely on cash reserves. In fact, over 46% of businesses used external finance in 2023. This is because borrowing creates flexibility and momentum for growth, which may otherwise be unavailable.
While changes to the base rate impact borrowing and saving costs, lenders will adjust rates based on their operational needs. After all, a bank itself is still a business with running costs to cover.
A lower base rate reduces borrowing costs, boosts asset values, and encourages spending by making saving less attractive. Conversely, higher rates make borrowing more expensive, limiting consumer spending and increasing business costs.
For businesses, interest rates directly affect cash flow and investment decisions. High rates can increase fixed costs like wages and supplies while reducing consumer demand, making it harder to remain competitive. The cost of business loans also varies depending on the type of financing available, influencing expansion and operational strategies.
How Consumer Spending Affects Business Revenue
Lower interest rates typically lead to increased consumer spending, as individuals find it more affordable to borrow and have more disposable income because of this. and the opposite is also true. For example, across the UK, high interest rates have as much as tripled some people's monthly mortgage payments, making housing more expensive.
Landlords also raised rent to cover the mortgage payments on their properties, which impacted the average rent in competitive rental markets. The resulting financial strain meant that most consumers had less disposable income, and also caused inflation to drop gradually in response to the limited purchasing activity - and this affects businesses.
This could provide a boost to businesses reliant on consumer demand, such as retail, hospitality, and property. Last year, consumer confidence wavered. So, this reduction in borrowing costs could help stabilise spending patterns and support revenue growth, just as long as inflation remained under control.
Despite the rate cut, businesses could still face broader economic headwinds. The UK’s sluggish growth, political uncertainty across the globe, and the prospect of new trade restrictions under Trump's administration are all affecting market confidence.
Recruitment firms have already reported hesitancy among employers to take on new staff due to economic unpredictability. While lower interest rates should, in theory, incentivise hiring, many companies may remain cautious in the short term until they see clearer signs of economic stability.
One recruitment firm reported that the number of role in London’s finance sector dropped by 12% year on year in 2024.
Sector-Specific Impacts
Many SMEs, particularly in the North East and North West, have cited funding access as a key hurdle to growth. Lower borrowing costs could ease this burden, enabling investment in new products, marketing, and technology. In fact, according to recent data, the North has stayed relatively buoyant in the face of last last two years' economic hardship. 40% of business owners in the North don't think their business plans would be affected by a lack of access to funding.
While controversy around the Autumn Budget has died down, there are still concerns over government tax policies affecting farming and food production. Supermarkets, including Tesco and Co-op, have called on the government to reconsider inheritance tax reforms, arguing they could put further strain on UK farmers.
The UK property sector has been under pressure due to rising borrowing costs in recent months. While a lower base rate may ease some of this strain, developers and investors will be watching gilt yields and government borrowing levels closely.
But it certainly still presents a glimmer of hope for UK businesses. For two years, the landscape has had an atmosphere of cautious optimism, among lay-offs, high borrowing rates and political upheaval - all of which is no mean feat.
For now, businesses will need to weigh up whether this is the right moment to invest, or whether uncertainty still warrants a more cautious approach.
Get Access to Business Funding
If you're looking to invest in the growth of your business, we have a team of specialists who can assess your unique circumstances and match you with a suitable product. We have a dedicated team of business finance specialists at our disposal, who have long-standing relationships with lenders and can get you access to market-leading rates.
Our team of business finance brokers work daily to secure suitable finance solutions for businesses. Contact us today to discuss your specific needs and start the process of obtaining the funding you require.
To see what we can do for you, call us on 0203 880 8890 or book a free consultation below.
