UK SME Borrowing Costs: Are Business Loan Interest Rates Rising or Falling?

UK SME borrowing costs mostly fell through 2025, based on the Bank of England's effective interest rate on new loans to SMEs. The rate was 7.00% in January 2025, dropped as low as 6.18% in September, then edged up to 6.26% in October. That is a net fall of 0.74 percentage points (74 basis points) from January to October, but not a straight line down. Source: Bank of England, Money and Credit (January 2025)

Are UK SME loan interest rates rising or falling in 2025?

If you measure "SME borrowing costs" using the Bank of England's effective rate on new SME loans, the direction in 2025 was down overall, with a small late-year wobble. October is the latest 2025 month covered in the Bank's Money and Credit release as of the December 2025 publication schedule. Source: Bank of England, Money and Credit (October 2025)

2025 monthly snapshot: effective interest rate on new loans to SMEs

Month (2025)	Effective interest rate on new SME loans
January	7.00%
February	6.90%
March	6.75%
April	6.79%
May	6.54%
June	6.51%
July	6.41%
August	6.35%
September	6.18%
October	6.26%

The sharpest part of the easing happened across spring and summer, for example May was 6.54% and July was 6.41%. Source: Bank of England, Money and Credit (May 2025)

By early autumn, the rate reached 6.18% in September (down from 6.35% in August), before rising to 6.26% in October. Source: Bank of England, Money and Credit (September 2025)

What exactly is the "effective interest rate" for SME loans?

The Bank of England's "effective" rate is an average rate calculated in a standard way, based on interest charged during the period relative to balances, then annualised. "New business" is the rate on loans agreed in that month. The Bank also defines SMEs (for these series) as private non-financial corporations with annual debit turnover of £25 million or less. Source: Bank of England, Effective interest rates (visual summary and definitions)

This matters for decision-making in 2026 because it is a market-wide indicator, not a quote. Your actual rate will still depend on risk, security, term, sector, and whether you choose a fixed or floating structure.

Why did SME borrowing costs move in 2025?

1) Bank Rate cuts reduced the "floor" for many business rates

Across 2025, the official Bank Rate stepped down in several moves, including cuts in February (to 4.50%), May (to 4.25%), August (to 4.00%), and December (to 3.75%). Lower policy rates usually feed into lower borrowing costs, especially for floating-rate lending, although the pass-through is rarely one-for-one. Source: Bank of England Database, Official Bank Rate history

2) Spreads can widen or narrow even when Bank Rate falls

Even in an easing cycle, SME pricing can move around because lenders reprice for:

• credit risk (including cashflow volatility and sector risk),
• security and recovery prospects,
• product mix (term loans vs revolving facilities),
• funding and capital costs.

That helps explain why the SME effective rate did not fall every single month in 2025, and why it rose from September to October even though the broader direction for the year was down.

3) Lender commentary points to easing pressure, but not "cheap money"

UK Finance's commentary through 2025 highlights that borrowing costs have moderated compared with earlier peaks, which can support demand, but conditions remain sensitive to rates and confidence. Source: UK Finance, Business Finance Review (Q3 2025)

What to watch in 2026 if you borrow as an SME

Scenario: gradual easing continues, but at a slower pace

The Bank of England's guidance in December 2025 said Bank Rate is "likely to fall gradually further", but stressed it depends on how inflation-related pressures evolve. For SMEs, that points to a reasonable base case of slowly improving borrowing costs, with the main risk being pauses or reversals if inflation proves sticky. Source: Bank of England, latest interest rate decision and outlook

Practical implications for SME finance plans

• Budget for volatility, not just a smooth downtrend. October 2025 is a good reminder.
• Compare fixed vs floating based on cashflow risk, not headlines. A slightly higher fixed rate can still be worth it if it protects margin.
• Time applications around strong trading periods, lenders price risk and proof of repayment ability still dominates.
• Review covenants early, especially if your facility was agreed during higher-rate periods and headroom has narrowed.

How to reduce your business loan interest rate in practice

• Improve the credit story: clean management accounts, clear debt service coverage, and a simple cash conversion narrative.
• Offer better security where possible: lower loss given default often equals lower pricing.
• Right-size the term: do not borrow long for short needs, it can cost more and restrict flexibility.
• Shop structure, not just rate: fees, repayment profile, and covenants can change the true cost.
• Use competition: a second credible offer can materially tighten spreads.

Conclusion

• Using the Bank of England's effective rate on new SME loans, borrowing costs fell overall in 2025, from 7.00% in January to 6.26% in October.
• The path was uneven, including a rise from September (6.18%) to October (6.26%).
• For 2026 planning, the best signal is "gradual easing with bumps", so build resilience into cashflow forecasts and funding structures.