What will rising interest rates mean for small businesses?
As the Bank of England brings in rising interest rates, Ted Winterton, the UK CEO at Bibby Financial Services, suggests there may be significant long-term implications for small firms.
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 the bank rate this month, from 0.25 per cent to 0.5 per cent, may not sound like much of a change, but the long-term implications for businesses could be big.
In its forecasts released this month, the Bank of England anticipated two further rate increases of 0.25 per cent over the next few years in order to cope with rising inflation, bringing the base rate to one per cent by 2020.
There are now around 1.3m more businesses in the UK than there were in 2007. Those 1.3m businesses, around a quarter (24 per cent) of all businesses, have never experienced rising interest rates.
For those owners that have experienced rising interest rates before, how it affected their business and the way they responded to it will be a distant memory.
According to Bibby Financial Services’s Global Business Monitor, over half (56 per cent) of UK businesses expect to be affected by rising interest rates, and two fifths (39 per cent) believe that this would negatively impact their business.
Firstly, rising interest rates mean 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 lower 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.
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