Bank Rate at 3.75%: what the cost of money does to your margin

Bank Rate is 3.75% and has just been held there. Most owners have filed that under "financing". It belongs under "margin", because the cost of money now arrives in your accounts through three doors at once.

1. The problem: three cost lines move together

The Bank of England reports Bank Rate at 3.75% and inflation at 3.1%, against a 2% target. Your overdraft, invoice finance and asset loans are priced off that rate.

The second door is stock and work in progress. Every pound tied up in either carries an interest cost, even when no lender sends you an invoice for it. The third is your own input costs, which keep rising while you wait for customers to pay.

The danger is that each line looks small on its own. Together they take several points off margin, and the accounts show it a quarter late.

2. The evidence: costs are rising faster than prices

The Office for National Statistics reports that producer input prices rose 6.1% in the year to August 2026, while output (factory gate) prices rose 3.7%. Consumer prices rose 3.1% over the same period.

That 2.4-point gap is the squeeze in one number. If your selling prices follow CPI and your costs follow input prices, you are absorbing the difference. Add financing at 3.75% on the cash you carry, and the gap widens.

This is a national average, so your own figure will differ. The point is that the direction is clear, and that it hits businesses of every size and sector that buy, hold and sell anything.

3. The solution: price the cost of money into each line

Most small companies carry one blended margin and one blended interest charge. The better approach is to charge each customer and product for the cash it actually uses. A product that sells slowly and sits in stock for 90 days costs far more to finance than one that turns in 15. A customer who pays in 60 days costs more than one who pays in 14, even at identical gross margin.

Once you see margin after financing cost, by customer and by product, the decisions become specific: reprice, shorten terms, cut a slow line or ask for a deposit.

Tips and tricks for this week

• List your five largest customers and note their real days-to-pay. Multiply the invoice value by days outstanding and by your borrowing rate to see the cost.
• Find the three slowest-moving stock lines and add a holding charge to their price in your costing sheet.
• Offer a small, clearly stated discount for payment in 7 days, but only where it costs less than your financing rate.
• Put a minimum order value on small orders that tie up cash for the same time as large ones.
• Set a date to review prices every quarter, not whenever a supplier complains.

4. Why the principle works: a rule, plus a fixed review date

The Bank of England does not react to each data release. It works to a stated target, and its Monetary Policy Committee meets eight times a year to decide what Bank Rate is needed to bring inflation back to 2%.

The same discipline suits a small business. Set a minimum margin after financing cost, decided in advance, and review it on a fixed calendar. You stop arguing each price from scratch, and you act on the numbers before the squeeze reaches the bank statement.

If you want to see your own margin by customer and product, the Business Health Check is a place to start.