How are increasing interest rates affecting Small Businesses?

The UK is currently facing a cost of living crisis. With inflation at a 40-year high, the Bank of England has taken steps to combat this, raising interest rates to get inflation under control.

Interest rates - why are they so high?

The primary reason for the rise in interest rates is the surge in inflation. UK inflation, last reported at 8.7% in April, has escalated due to a global price increase caused by various factors. These include the rising demand for goods following Covid-19 restrictions and the repercussions of the recent Russia-Ukraine conflict.

As businesses struggle to meet the escalating demand, consumers find themselves chasing after limited supplies, causing prices to climb even further. One approach to counteract the impact of high inflation is raising interest rates. The responsibility falls upon the Monetary Policy Committee (MPC) to set the base rate of the Bank of England, aiming to maintain stable and low inflation.

Since December 2021, when inflation began to escalate, the Bank of England has implemented twelve interest rate hikes. Currently, as of June 2023, the base rate stands at 5%, and further increases are anticipated in the near future.

I´m a small business owner - what does this mean for me?

Rising interest rates significantly affect small businesses, primarily regarding higher borrowing costs. Given that small enterprises often rely on external financing to fuel their growth and invest in essential resources, the increased expense of borrowing presents a challenge in accumulating the necessary capital for their expansion and prosperity.

Moreover, the combination of inflation and escalating interest rates leads to higher overall costs, which impacts consumers' disposable income. As a result, individuals have less money available for discretionary spending, causing a decrease in consumer demand. This demand reduction subsequently affects a business's revenue, amplifying the pressure they face amidst escalating expenses related to stocks, materials, and deliveries.

For small businesses, these factors add an extra layer of complexity and underscore the importance of strategic financial planning, adaptability, and innovative ways to manage costs while maintaining competitiveness. Navigating through this landscape needs wise decision-making and exploring ways to optimise operational efficiency and customer engagement, all while ensuring sustainable growth in the face of rising challenges.‍

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How do I support my business? What help can I get?

1. Review Your Business Plan‍
Take a moment to revisit your business plan and see if it can adapt to the current challenges. Consider if your goals are flexible enough to withstand the obstacles you may face. Also, assess the type and amount of debt your business has.

2. Be Prepared for Rising Interest Rates
When interest rates go up, it's important for businesses to be prepared and not borrow too much. If you have credit card debt or existing loans, higher interest rates can mean more money going towards interest payments, leaving you with less money to spend and higher expenses. Sometimes, you might find yourself only paying off the interest without progressing on the loan.

3. Consider Shorter-Term Loans and Risks‍
As interest rates rise, businesses may opt for shorter-term loans based on their cash flow. However, this choice can have greater risks, potentially leading to more negative consequences.

4. Monitor Currency Value‍
When interest rates increase, it can also cause the currency's value, like the Great British Pound, to go up. If your business earns income in foreign currencies, rising interest rates can affect your profits due to the currency's appreciation. To manage this risk, you can use forward contracts to mitigate differences in exchange rates when conducting transactions in foreign currencies.

5. Pay Attention to Your Supply Chain‍
Keep an eye on your supply chain because if prices increase or payment terms change, it can impact your customers and suppliers. Even if your company is not directly affected by interest rate changes, your suppliers might be. This can increase your costs as they try to cover higher interest charges. Having fixed supply prices in contracts can help reduce this risk.

However, it's important to note that rising interest rates can have a domino effect on the pricing of manufacturing, distribution, and business services, leading to increased costs throughout the business supply chain due to inflation.

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To navigate these challenges, carefully assess your financial situation, be mindful of risks, maintain good communication with your partners, and consider adjusting pricing and contracts as needed. Adapting to rising interest rates requires strategic planning and a focus on long-term sustainability.

If you need further help, feel free to get in touch with our team.

Call us: 0345 260 0101
Message us: enquiries@frostbr.co.uk

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