If interest rates rose – would your business be OK?
Value of the Pound
One of the notable effects of an increase in interest rates is that it will also be likely to increase the value of the pound. This is because an increase in interest rates demonstrates confidence in the currency, which in turn increases demand, which then increases value.
This will mainly affect your business if you import or export goods to other countries. If you import goods, a strong pound will be good news for your business as you will be able to buy them cheaper. If you export goods a stronger pound will mean they are more expensive for your purchasers in other countries so you may experience a drop in demand. You should prepare for this by focusing on increasing domestic sales if your business model allows for it. This will hopefully counteract the fall in foreign demand.
If your business owns mortgaged property odds are that your mortgage will be on a variable rate, unless it is a relatively new product. Variable rate mortgages tend to follow the Bank of England base rates very closely so if these rise it is likely the interest rate on your mortgage will also rise very quickly in response.
On a mortgage of £200,000 a rise of even 0.5% is an extra £1,000 your business needs to find each year before considering any other costs you may incur. Whilst interest rates are their lowest and unlikely to fall any further, now may be the best time to try and negotiate a fixed rate with your current lender or shop around to try and remortgage the property at a more competitive rate.
Obtaining Business Funding
An increase in interest rates will generally mean that there is a reduction in bank lending. Whilst it becomes more profitable for a bank to lend money, loans become higher risk due to the higher interest rates attached to them. The criteria to obtain loans, therefore, becomes more stringent than it would be otherwise.
When interest rates rise it will, therefore, become more difficult to obtain finance and will also be more expensive. If you are considering applying for additional funding in the near future it may be worth bringing your plans forward. More information about the funding which may be available for your business can be found here.
Increasing and lowering interest rates is also used as a tool to affect consumer behaviour. When interest rates are lower, consumer spending will generally increase due to poor returns on savings. They will be more likely to make impulse purchases on lower value items.
As interest rates increase consumer spending will generally drop in favour of saving in the short term. However in the long term, with saving being more beneficial, consumers will generally make larger purchases of bigger items which they have made a long term decision to purchase.
This is where your marketing department should be ready to highlight that the product or service you are offering is a necessity and something consumers feel they need rather than a luxury.
Existing Business Lending
Like many other UK businesses, it is likely that you will have a commercial credit card and a business overdraft facility. Whilst it is well known that when interest rates increase as do mortgage rates increase, (as they are the most reactive), it is lesser know that the rates on these other products are also likely to increase shortly after any rate rise. To assess whether you are exposed to this you should review your terms and conditions provided by your lender.
Unfortunately, their are a number of businesses which are currently just surviving at their overdraft limit after bills have been paid and making minimum payments on the commercial credit card. The effect of a rise in interest rates could push these businesses over the edge due to the increased cost of the finance.
If you feel that your business may be adversely affected by an increase in interest rates, now may be the time to do something about it and get a fresh start by contacting one of our business rescue experts.