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What does an interest rate rise mean for businesses?

There hasn’t been an increase in the Bank of England Base Rate for more than ten years, with the last rise taking place in July 2007. The Bank of England’s momentous decision to increase Bank Rate this month from 0.25% to 0.5% may not sound like much of a change, but the long-term implications for businesses are significant.

In its forecasts released this month, the Bank of England also expects two additional rate increases of 0.25% over the next few years in order to cope with rising inflation, bringing the base rate to 1% by 2020.

There are now around 1.3 million more businesses in the UK than there were in 2007[1]. Those 1.3 million businesses, a quarter (24%) of all businesses, have never experienced an increase in interest rates. For those that have experienced a rate rise, how it affected their business and the way they responded to it will be a distant memory.

According to Bibby Financial Services’ Global Business Monitor, over half (56%) of UK businesses expect to be affected by an interest rate rise and two fifths (39%) believe that this would negatively impact their business.

Firstly, higher interest rates mean that consumers will be less likely to borrow and more likely to save money rather than spend it. This could reduce consumer demand for products and services, potentially prompting many to reduce their prices in order to attract more customers and remain competitive.

For those using external finance – depending on the form of finance used –  the amount of interest charged could increase, pushing up costs at a time when profit margins are already being squeezed.

Therefore, an interest rate rise could result in reduced revenues, smaller profit margins and higher costs – a potentially deadly cocktail. There are, however, a number of measures SMEs can take to prepare themselves:

  1. Review your business plan and your short-term and long-term growth objectives. Ensure that you have accounted for further rate increases and leave enough room for the funding you need to invest in your business so it can continue to innovate and grow.
  2. Review your debt-to-equity ratio. Use this information to determine whether you need to pay down your debt or postpone borrowing plans.
  3. Consider applying for fixed rates. Although you may pay more in the short term, if rates increase again, you could save a substantial amount of money in the long-term. This will also provide you with more certainty and consistency on what you need to pay each month.
  4. Where possible, make expansion plans and apply for funding in a low interest rate environment to keep costs low. Although the Bank of England has increased the Base Rate this month, interest rates are still at historic lows and are only likely to increase.
  5. Regularly speak to your lender and keep them up-to-date on your current position and plans for the future. Having open and honest conversations with them can help to identify problems early and will ultimately benefit your business.

Overall, the increase in the Bank of England Base Rate could have significant long-term consequences for businesses. With the Bank of England forecasting additional increases in Bank Rate over the coming years, it is crucial that businesses respond now by reviewing their business plans and funding strategies in order to limit the impact increasing interest rates could have on them.

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/559219/bpe_2016_statistical_release.pdf
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