02/08/2018

Interest Rates - What’s The Real Impact On Your Business?

Jen Smith

By Jen Smith

Liverpool Street sunset from the South Bank

Today, the Bank of England Monetary Policy Committee announced its second increase rate rise in the space of 12 months, confirming an increase from 0.5% to 0.75%.

Whilst a small increase, it is unlikely to be the last as the Bank of England looks to reduce inflation from 3% to 2%.

What I’ve found since the first rate rise announcement last year is that most news coverage has been focused on the impact on homeowners and savers. And whilst that’s important to me on a personal level, I’ve been wondering what the news means for small business owners like you and me?

So, I’ve been on the hunt to find out exactly what this rise, and subsequent rises, will mean for the small business community, and what we need to be doing now to adapt to them. 

 

Consumer spending is likely to decrease  = less demand for goods and services

Mike Cherry, national chairman of the Federation of Small Businesses, said today: "One big concern is the impact of rising rates on consumer demand. For the first time in 30 years, we have an environment where household outgoings are bigger than household incomes."

Increased outgoings; the cost of living continuing to rise faster than wages; and less "cheap credit" available to bolster spending; will all contribute to a reduction in consumer spending as they have less disposable income to spend on goods and services. 

This will hit businesses where it hurts most = cash flow.

It was predicted that retail spending would take a hit in 2018, however, the UK recorded its strongest figures for over three years in the last quarter - boosted by the World Cup and hot weather. Despite this, it would be complacent of small businesses to expect this to continue, especially with Brexit looming ever closer. 

If consumer spending does nosedive, your business may see lower sales, higher inventory and lower profitability.

 

What can small businesses do about the interest rate rises?

Keeping a close watch on sales and your forecast is vital now more than ever. Continue to analyse what goods and services sell best and look for new strategies to further market these if others drop off

You may need to lower your prices if demand decreases or if you’re no longer as competitively priced.

If your business really starts to see demand drop, another strategy to offset the effects is to reduce your operating expenses. Is there room to make savings within your business? Even if you don’t see demand decrease, it’s a wise approach to increase your profitability so long as it doesn’t affect how well you serve your existing customers.

The other major impact I can see of the interest rate rise is this:

 

If your business finances are already stretched, it’s going to get tougher.

In a recent survey by business recovery firm Begbies Traynor, they discovered that almost half a million businesses are “experiencing significant financial distress”. The report suggests that increased costs and flagging consumer demand will further exacerbate this situation. 

And in a recent survey that asked how many months a business could last with the cash they had in the bank right now, the majority would last less than 6 months. 15% of them wouldn’t even make it through the month.

This is worrying, particularly if you rely heavily on borrowing - especially debts with a variable interest rate, the cost of that borrowing is now going to increase, which might create challenges in paying back your debts. 
 
If you’re worried about this, seek sound financial advice for your business and look for alternative ways to fund business growth such as grants, crowdfunding or growth specific loans.
 
 


 

Of course, with every challenge we face in business comes opportunity. Opportunity to look for new ways to grow, improve and thrive. If this BDO report is anything to go by, businesses continue to be optimistic about their future growth, and even in these uncertain times, I’d count myself among that number.

We’d love to hear how you think the rises will impact you and your business. Leave your comments below the line. 

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Jen Smith

Published 02 August, 2018 by Jen Smith

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