Small businesses may have another plate to spin this year with the Bank of England announcing a rise in interest rates. Let’s take a look at what’s going on, what it could mean for your business and how you can reduce impact.
What’s been announced?
The Bank of England is expected to raise interest rates today from 0.25% to 0.5%, in an attempt to control rising inflation. In fact, financial markets are suggesting there may be four rises in interest rates this year, seeing rates at a record level high since 2009 by year end.
Inflation has been rising steadily in the UK as a result of increased government spending in response to the pandemic. This inflation has triggered an increase in the cost of products and services around the country. The Governor of The Bank of England, Andrew Bailey, said recently “we will have to act and must do so if we see a risk”.
What does it mean for your business?
If you’re worried about the Bank of England’s latest announcement, it can be useful to find out more about the impact of rising interest rates so that you can better prepare. So what does it really mean to you and your business?
Firstly, higher interest rates have a knock-on effect on the cost of borrowing. This is because as the value of loans decreases, lenders need higher interest rates to make their borrowing more worthwhile. What this means is that getting funding for your business will be more expensive. And that could have an impact on your cashflow, growth and investment plans, especially if you rely heavily on funding. Fortunately, you still have time to look ahead at your needs and act sooner before further interest rises. That way you’ll secure more favourable terms.
Higher interest rates can also have an impact on consumer spending. This is because your customers will have less disposable income due to higher payments on personal loans and mortgages. If you know that you might see a change in your sales going forward, you can get ahead of them by being prepared. You may decide to reduce your costs within the business, ensure you have back up cash reserves or invest in funding early before the cost of borrowing goes up.
But it’s not all doom and gloom. Higher interest rates also tend to reduce the pressures of high inflation. This is because people are less likely to borrow money when there is a risk they won’t be able to repay and the economy becomes more stable. This stability is a good thing and can help the economy recover from the last couple of years, creating a more predictable business market in years to come.
Experts say that raising the interest rates gradually this year will reduce the chance of sharper increases in the future. If interest rates are going to increase, doing so gradually will be much easier to prepare for and manage.
Laith Khalaf, Head of Investment Analysis at AJ Bell explains “a February hike would help persuade the market that the Bank really means business, and help to stave off embedded inflationary expectations that could spark a dreaded wage-price spiral”. This suggests that there are some positives to these changes in the longer term.
How can you prepare for future interest rate increases?
With fair warning of a potential upward trend in interest rates, you have time to plan for the future to reduce the impact on your business.
In particular, we suggest regularly revisiting your business plan and objectives to make sure they’re flexible to unpredictable changes. For example, if you’re looking to get funding soon, make sure you have enough cash and profit in your business to afford the funding now and in the future. So that higher interest rates won’t impact your cashflow, your future plans and your ability to secure funding.
You may also want to consider limiting spending and try to improve other areas of your business instead. For example, could you refinance some assets to release cash or reduce your overheads by relocating to more affordable offices?
You could also focus on improving your credit score and payment terms to put your best foot forward when funding needs arise. Check out our Capitalise for Business platform that helps you to understand, track and improve your credit score, all for free. You can also find funding that’s a better fit for your business from a wide range of trusted lenders.
There’s no need to feel discouraged by rising interest rates if you start taking action right now to make sure your business is prepared.