How will the increase in interest rates affect businesses?

Why are interest rates being increased?

On Thursday 2nd of February 2023, the interest rate (Bank Rate) increased by 0.5 percentage points to 4%. It is predicted that the Bank of England base rate will rise as high as 4.4% by July 2023. The reason interest rates are being increased is that the rate of inflation is currently too high, the target is to get inflation down to 2%. It is uncertain how high interest rates will go, it will all depend on what happens in the economy and what we think will happen to the rate of inflation over the next few years. Interest rates will be assessed every six weeks or so to decide whether a change is needed.

How does this impact businesses and what does this mean for business owners?

The rising rate of interest will affect businesses in many ways and through several channels. The three main ways rising interest rates can affect your business are as follows: 

• If your business is impacted, directly or indirectly, by end users and customer spend, your business top line may be affected since the slower economic activity is likely to lead to lower demand for their goods or services. People will be increasingly more nervous and reluctant to shop on credit, due to higher personal borrowing costs. Ensure you review forecasts and plan wisely as to the potential impacts on your revenue.
• Businesses will face higher borrowing costs, which is an increased cost to the business which impacts profitability, further eroding margins as businesses refrain from borrowing money. 
• Even if your business is not directly impacted, you may experience second-hand effects from suppliers. For example - if your suppliers have had to increase their prices, you would be forced to increase your prices which could further affect sales. Or alternatively, your supplier may be facing supply disruptions, which may leave you having things out of stock.
• If some of your finance options are variable (i.e. tied to the base rate) then the amount of monthly repayments will increase, therefore impacting your cashflow.
• You need to keep close to other players in your market and industry experts to understand the impacts on your customers.  For example, if you are in a business selling capital items, this will likely have an impact because of the rising cost of finance.
• If your business has surplus cash in deposit accounts, then this will affect you positively meaning your business could benefit, assuming you can take advantage of the higher savings interest rates.

Businesses will refrain from borrowing money when the interest rates are higher, which can leave them with less money available. When interest rates are higher it also leaves people with less money and therefore, people are stricter with which goods and services they are spending money on. This lower consumption from consumers ,in turn, leads to a reduction of demand for goods and services, reducing the revenue of businesses, unfortunately, which can lead to decreasing output and demand for labour.

What is the impact on business loan rates?Example – A £1,000,000 CBILS Loan (Coronavirus Business Interruption Loan Scheme) over 6 years, and assuming in Year 2 of the loan (i.e. no government support)

1)    If base interest rate remained as it was - Base rate of 0.1%, and CBILS variable rate of 5% over base (total interest rate of 5.1%)
£1,000,000 original loan 
Total annual repayments in Year 2 - £193,816
Interest cost in Year 2 – £39,981

2)    Base rate increase to 4%, and CBILS variable rate of 5% over base (total interest rate of 9%)
£1,000,000 original loan
Total annual repayments in Year 2 - £216,306 (increase of 12%)
Interest cost in Year 2 - £72,308 (increase of 81%)

(Above is indicative amounts only by way of comparison)

What actions should you be taking?

• Update your monthly/weekly/daily breakeven to factor in higher monthly finance repayments. See here for a guide on how to calculate your business breakeven.
• Update your cashflow forecast to account for higher finance repayments
• If you have surplus cash, look at options to get a higher level of return/interest on deposit accounts, ensuring that you invest wisely.
• Download our Interest Review tool to review all the different forms of finance you have in your business, check what the actual interest rate now is (particularly where it is tied to base rate), and action as follows:
• Ensure you are aware of the additional amount of costs/repayments due on these different forms of finance
• Review all the forms of finance, and look at options of re-aligning necessary finance needs by utilising the lowest cost options that you have available, either through a re-finance or by restructuring your finance options.  For example, on your review by using our Interest Review tool, you might find that your CBILS loan is one of the most costly finance options now, and therefore will impact your decisions to repay this or move this finance to another option that is lower interest rates.

What happens next?The interest rate will be reviewed every 6 weeks; The Bank of England’s Monetary Policy Committee last met on Thursday 2nd February (when they increased it to 4%). Their next meeting will be on the 23rd of March.

With all of the above, it is important to take professional advice.  Liquidity is essential, cash is king.  Ensure your business can stay liquid, and ensure that any financing is the right-size for your business, and you ensure that you are aware of any immediate/on-demand finance options, and the effect this may have on the liquidity/acid-test ratio in your business.
 

For more information on how we could help you and your business, contact us using the form or call 02476673160.

 

 

Please note: This article is provided for information only and was correct as at time of writing (02/03/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.