UK Interest rates: what they mean for your business

In business lending, the interest rate is the main cost of borrowing money, quoted by lenders as a percentage of the capital offered in a loan, line of credit or other finance facility. In the UK, the Bank of England’s base rate (recently held at 3.75% on 17 September 2026) influences what lenders charge, but their rates vary based on their own criteria and lending terms. 

We explore what interest rates mean for your business, the different types (and the terms to look out for), how they’re applied and the main influencing factors.

Note, this guide is for informational purposes only and not to be treated as financial advice.

What is an interest rate and how does it affect business borrowing?

The interest rate finance providers offer is a key consideration when your business applies for a loan, credit card or alternative finance product. It helps you understand your likely repayments and borrowing costs. In most lending facilities, interest is charged on the debt you carry across the term of your loan/finance agreement. 

In basic terms, applying a simple interest rate, if you have a fixed-rate loan of £10,000 at 5% per year, you pay £500 in interest each year. However, this doesn’t take into account your reducing balance and whether your loan is subject to compound interest, which we’ll discuss shortly. 

Factors affecting what business interest rates lenders offer

UK interest rates can vary widely depending on a range of factors, such as:

• The loan term

• The amount you borrow

• Whether the rate is fixed or variable

• If the loan is secured or unsecured

• Any guarantees provided

• Your trading history

• Your credit history and credit assessment

Compounding interest

Essentially, compound interest means paying interest on the interest added to your outstanding debt over time, rather than just the principal amount. Compound interest can be significant with larger loan amounts, especially mortgages, and in certain loan agreements where you may not repay anything in the first year or 18 months, etc. 

It’s important to confirm whether the lender’s interest compounds. Also, find out whether there are early repayment options (and if the lender charges for it). This can save you a lot of money on interest if you can repay more than your monthly instalments at any point or pay off the remainder of the loan early. 

Note: Some loan providers only charge interest on the principal amount or remaining balance, whereas others use compounding interest. 

Examples of compounding interest on a business loan

To give you an idea of how interest compounds, let’s use a simple example of a business taking out a fixed-rate loan of £10,000 at 5% per year for, say, 3 years. 

Here’s how the compound interest would work if, in this example, we say no repayments need to be made over those 3 years:

Year 1

Interest added: 5% of £10,000 = £500

Total outstanding = £10,500

Year 2

Interest added: 5% of £10,500 = £525

Total outstanding: £11,025

Year 3

Interest added: 5% of £11,025 = £551.25

Total outstanding = £11,576.25

This is a basic example of how compounding works, as most loans involve regular monthly repayments. In that case, compounding is less costly as you’ll be chipping away at the principal amount each month. 

The Bank of England’s base rate (or “Bank Rate”)

The Bank of England’s (BoE) base rate, officially the “Bank Rate”, is set by the Monetary Policy Committee, which closely monitors and considers various economic factors. These include the UK economy’s performance, domestic indicators like inflation, wages and consumer spending, plus global factors, such as other currencies, geopolitical events, energy prices, etc. 

At the time of writing, the base rate is 3.75% (which was held on 17 September 2026). But keep an eye on BoE interest rate news. The next announcement is expected on 5 November 2026.

Potential changes are widely publicised across news outlets, financial press and government announcements, as they can have a major impact on people and businesses, and influence rates on loans, mortgages and other lending facilities, and also bank savings rates. 

Impact on business lending rates

When the BoE interest rate changes, high street banks and fintechs will often adjust their rates accordingly, letting their customers know in advance of upcoming changes. 

If you have a variable rate, then your rate will move up and down according to these changes. While a fixed-rate loan locks in your rate, you can still predict the impact of base rate changes on future loans or mortgages when your term is nearly up.

How interest rates are applied to business loans and other financial borrowing 

Interest rates on loans and lending facilities are quoted to businesses during applications. They’re usually monthly or yearly rates, which confirm the percentage of interest you’ll be charged each month/year on the amount you’re borrowing. 

With a fixed-rate agreement, you’ll have a set percentage charged for the full term, while a product with a variable rate can go up and down during the borrowing term. 

Fixed vs variable rates of interest

A fixed-rate agreement gives you more predictable repayments, as the rate is set at the start and remains throughout your term. If you prefer stability, or expect the BoE Base Rate to climb during the period you want to borrow for, this can be a good option. 

However, you may prefer a variable interest rate if you don’t want to be locked into a rate, especially if you want a longer borrowing period, and you expect the BoE to fluctuate and preferably go down over time.

Variable-rate offerings may have more favourable initial terms and more flexibility, while fixed-rate loans offer predictable repayments and protection from rising rates.

Key interest rate terminology you need to know

Beyond fixed or variable interest rates, you should get to know other key terminology when comparing lender rates and estimating borrowing costs, such as APR, AIR, flat rate and simple rate. Here’s an overview of the main terms to understand:

APR and representative APR

The annual percentage rate (APR) is the annual cost of borrowing, including interest and any fees the lender charges (such as arrangement fees). It’s expressed as a percentage of the amount being borrowed and helps you calculate and compare credit solution/loan costs. 

However, as the APR can vary widely based on various circumstances, lenders often advertise a ‘representative APR’, which acts like an average and represents what the lender expects to offer to at least 51% of its customers.

AIR

The AIR means the annual interest rate, which is the stated rate of interest charged (excluding fees). Unlike APR, it doesn’t reflect the full borrowing costs, such as lender fees. You’ll also need to know whether interest is applied purely to the principal loan amount or the outstanding balance during your term, as this affects what you’ll end up paying.

Flat rate

A flat rate is when interest is charged on the original amount borrowed, regardless of any regular repayments. So, while paying the loan, you’ll still be charged the rate on the amount borrowed, not your remaining balance. 

Simple rate

The simple interest rate is a way of calculating interest applied to the amount borrowed, without taking into account your reducing balance over time or any potential compound interest (interest charged on accrued loan interest to date). It’s a crude rate, used as a snapshot calculation.

AER

An annual equivalent rate (or AER) is a term usually reserved for savings accounts, rather than lending, and it lets customers understand the interest they’d earn over a year on money saved, including compounding interest.

Note: These all serve a purpose when comparing loans and financial products. However, it’s important to understand when and how lenders/facilities charge interest, and whether it compounds. This will help you determine the best interest rates and what form of loan is most cost-effective. 

HMRC interest rates

HMRC also has interest rates, which it applies to late tax payments and repayment plans, plus beneficial loans and B2B late payments. Here’s a brief overview of these rates:

Late payment and repayment interest charged by HMRC 

The rates are made simple by quoting the Bank Rate (BoE base rate) plus HMRC’s percentage charged (according to what’s set out in current government rules, which can be found on HMRC’s late payment and repayment interest rates page).

Here are current HMRC rates (as of the most recent changes on 9 January 2026):

• Late payment interest: Bank Rate + 4% (based on the current Bank Rate, that means a rate of 7.75%)

• Repayment interest: Bank Rate - 1% (meaning 2.75% based on the current Bank Rate)

Official rate of interest for beneficial loans

The official rate of interest (ORI) is set by HMRC and used to calculate the taxable benefit on beneficial loans. It reflects the current Bank Rate, which at the time of writing is 3.75%. The difference between the loan’s interest rate (if any is charged) and the ORI is treated as a benefit in kind (BiK). However, loan balances that don’t exceed a threshold of £10,000 (across a whole tax year) are exempt. 

Note, figures are correct at the time of writing and are subject to change. Please consult the HMRC website or a professional accountant for more information on how this can impact your business. 

Interest charges on late B2B payments

The government also sets a statutory interest rate on late business-to-business (B2B) debts. This helps companies suffering from late-paying clients. The statutory interest rate for late business payments (those legally 30 days or more overdue after the invoice date or date of goods/service delivery) is 8% plus Bank Rate, so currently 11.75%.

Learn more at HMRC’s late commercial payments page.

Be aware that this is general information, not tax advice, so please explore gov.uk resources and/or speak to a qualified accountant for specific guidance.

Business loan interest rates at Funding Circle

So, what about our own interest rates? Well, Funding Circle’s business loans are fixed-rate loans, with interest rates starting at 6.9% per year. The actual rate you receive depends on your credit assessment and how much you want to borrow (and for how long). 

However, you can use our business loan calculator to see your indicative monthly repayments and potential interest for your preferred loan amount and term, based on the average rate of our lowest-risk businesses and current fees.

Here’s an overview of our term loan features and benefits:

• Borrow between £10,000 and £750,000

• Repay loans between 6 months and 6 years

• Get a fixed rate of interest

• Apply in a matter of minutes, with decisions often given within the hour

• If approved, funds are typically available within 48 hours

• No additional fees to repay or settle the loan early. 

Check your eligibility 

Our business loans are predominantly unsecured and open to incorporated companies registered in the UK*. Use our business loan eligibility checker to see if a Funding Circle loan is right for you.

It only takes a few minutes and doesn’t affect your credit score, as we use soft searches. 

*While our loans are  unsecured, you will need to provide a personal guarantee.

UK business interest rates FAQs

What is an interest rate in simple terms?

Put simply, from a lending perspective, an interest rate is a charge for borrowing money over time. The lender provides an agreed sum of capital to be repaid over a period of months or years (and often as a set of instalments). The interest rate means that rather than just getting this amount back, a charge is applied to the principal amount and/or debt outstanding. 

Lenders earn interest for advancing capital or extending credit to cover the costs of funding the loan/credit agreement, compensate for the opportunity cost of committing the funds (which could be used elsewhere) and to make a profit. 

What is the Bank of England base rate now?

The current BoE base rate is 3.75%, as per the most recent announcement in September 2026, where the rate was held.

When is the next UK interest rate decision?

A decision about whether to hold the rate again or increase it (more likely than a decrease) is due on 5 November 2026. This will be made by the Monetary Policy Committee and announced by the Bank of England and the government, so keep an eye out for this. 

What is the difference between a fixed and a variable rate?

The main difference between a variable and fixed rate of interest is that a fixed rate is locked in for a pre-agreed period, while the variable rate can go up or down. Variable rates may be influenced by the BoE base rate, as well as market conditions and the lender’s costs and margins, and are subject to change within the borrowing period.

What is the official rate of interest?

The official rate of interest (ORI) is what HMRC uses when calculating the potential taxable benefit someone may have gained from a beneficial loan. It correlates directly with the BoE base rate, and HMRC treats the difference between the beneficial loan’s interest rate (if any) and the ORI as the taxable benefit. 

What affects business loan interest rates?

Business loan rates offered by UK lenders are affected by numerous factors. The underlying influencer is the BoE base rate, but obviously you’ll see widely differing rates on lender websites, across a range of financial products, as other factors are at play. These include the type of loan offered (fixed or variable, etc.), length of borrowing, loan amount and risk involved (such as whether the loan is secured or unsecured), plus your trading history, credit record and cash flow. Also, lender operating costs and margins further add to the rate.

Disclaimer

21/10/26 – 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, tax or legal advice. Readers should seek independent tax advice from a qualified professional. 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.