As more firms come to refinance, funding costs are rising, covenants are tightening, and the impact of higher interest rates is really starting to bite. Christopher McLean and Jon Bramwell look at what mid-market firms can do to help maintain their access to capital in 2024 and beyond.

Mid-market firms are increasingly concerned about the availability and cost of capital. Our Business Outlook Tracker, which surveys 600 mid-sized business leaders every two months, shows that in October 2023, businesses' confidence in their funding position dropped 24% since August, reaching the second lowest level recorded by the Tracker. The number of those pessimistic in their position has also more than doubled, from 5% to 12% – the highest level seen since last year.

Access to capital is getting harder and more expensive

Borrowers are having to paying more than three times the interest they were at the beginning of 2022 due to rising base rates. The table below illustrates this, with the example company continuing to pay a margin of 200 basis points (2.00%) over the Bank of England base rate.


January 2022

November 2023

Base rate​






Total interest payable​



Lenders are stress-testing affordability at levels even higher than this. This means that mid-market firms are having to demonstrate they can afford all-in borrowing costs up to four or five times the level they've historically paid. This is no mean feat.

Many borrowers are also struggling to comply with conditions in existing loan documentation signed up to before interest rate rises. These often include common financial covenants such as interest cover ratios, or cash flow available for debt servicing (CFADS) measures.

Businesses are doing what they can to manage the impact of high costs and rising interest rates, including restructuring operations, reviewing non-essential spending or investing in productivity, efficiency and automation. However, almost three quarters
of mid-market firms
anticipate they will need to raise additional funds over the next year.


What should borrowers do?

In the absence of interest rate hedging taken out before base rate rises, there isn’t much a business can do about rising borrowing costs. But they can and should prepare. Lenders don't like surprises and firms should be ready to initiate and lead the conversation. They need to be very clear on how their business is dealing with economic headwinds and other challenges.

Key pieces of advice:

  • Provide an update on your business plan and strategy​
  • Include detailed financial forecasts​ – it doesn’t have to be good news, but more about managing and delivering on expectations
  • Consider the impact on any financial covenants​, and signal the need for any amendments or waivers early
  • Provide your relationship manager with the all the information they'll need to manage their credit committee​ – this is something we help clients with all the time

It's a good idea to build relationships a level or two above your relationship manager as they may well not be a key decision maker. Should you need the support of the bank and can't get the right answer from your relationship manager, support from more senior decision makers can be crucial.


Diversify your lender base

Too many borrowers have long-standing relationships with one lender and then have limited options when appetite levels or requirements change.

Increasingly, mid-market firms find they can't rely on the high street banks for their funding in the same way they might have done in the past. This is due to regulations requiring banks to hold a minimum amount of capital on their balance sheets depending on the risk-weighted profile of their assets. As the leverage of a borrower increases – which often happens in turbulent times – banks have to reserve more capital, and as such, they have less available to lend. 

Mid-market borrowers should diversify their lending base to include the universe of alternative lenders that has proliferated since the global financial crisis in 2008-9. The options are wide and varied, but not always that visible. These include challenger banks, asset-based lenders and private credit funds. Facing fewer regulatory restrictions, these lenders offer a more diverse and flexible set of financing options and are actively looking to help firms who haven't been able to secure capital with their high street bank.


Prioritise ESG credentials

A firm’s ESG status, or its ability to transition to net zero, influences their credit risk assessment, say 85% of lenders. Most lenders now require an annual transition assessment as part of their credit review process – something that didn't exist just two to three years ago.

Lenders are under pressure from regulators, investors and limited partners to improve their own ESG credentials. As such, every large bank has made a commitment for their balance sheet to be net zero by 2050.

There’s also increasing pressure for lenders to disclose their scope 3 emissions – those emissions produced by their borrowers. In October 2023, the Department for Energy Security and Net Zero launched a call for evidence as to whether the government should adopt scope 3 emissions reporting in the UK. There's widespread support for this among UK lenders, illustrated by UK Finance’s response. Many larger lenders already disclose this information. For example, NatWest has published its target of reducing the emissions of its financing activity (scope 3) by 50% by 2030.

This is significant. It's prompting lenders to be more cautious about their lending decisions due to the direct impact on their own scope 3 emissions and net-zero targets.

It's easy to anticipate that lenders may want to move away from financing borrowers with poor ESG credentials when it reflects badly on their own targets for net zero and scope 3 emissions disclosure. This is increasingly influencing credit availability in the mid-market.

Prioritising your ESG status is also good for business. Large corporates are choosing which mid-market businesses they work with based on their sustainability credentials, meaning contracts can be won or lost due to ESG factors. A firm’s ESG status is becoming crucial in aligning the interests of both lender and borrower.

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Consider sustainable finance

Borrowing in a sustainability-linked way is a good option for borrowers to demonstrate to their lender the importance they place on sustainability. While levels of take-up may fluctuate depending on other business priorities, the direction of travel is clear to see, not least given the commitments by lenders to meet their own climate goals.  

Sustainability-linked loans include sustainability performance targets linked to ESG factors. By meeting these targets via agreed key performance indicators, borrowers can achieve discounts in the interest rate payable. 

Committing to track, monitor and improve ESG credentials via loan documentation sends a powerful signal to lenders and other stakeholders about a firm’s intentions.

Not paying attention to your ESG credentials could start to impact a firm’s ability to access finance. While it's not compulsory, it is something all firms should consider in their next financing round.

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market insights hub

For more advice or information contact Christopher McLean  or Jon Bramwell