August 2nd 2018 saw interest rates rise from 0.5% to 0.75%, and whilst an increase has been expected for some time, this didn’t stop it feeling like a crushing blow to many. One of the key parties that may be hit the hardest is small businesses, though the hike doesn’t have to spell complete catastrophe.
Here, we go through what the interest rate situation is, what it means for SMEs, and the steps they can take to combat its effects.
This is the second time interest rates have increased in a decade, with the UK being at an emergency rate for over nine years. Back in 2008, it was at 5%, and whilst The Bank of England wants to move Britain away from low rates, they’re now hoping to shift us to a new normal range of 2-3%.
How soon the UK will get to this level hasn’t yet been determined, but the Bank has said the increase will be gradual. The financial markets have predicted that there may be one or two more interest rate rises of 0.25% before 2020. It’s unlikely that these increases will be before we officially leave the European Union.
August’s rise means that there will be a collective cost of around £355m to SMEs in the next twelve months. Not only will the money spent on borrowing increase, but some SMEs may find themselves unable to do so again anytime soon. Just 11% of loans available are of the fixed rate type, meaning most have to choose between risking interest rates rising again, or not borrowing at all.
The Federation of Small Businesses recently found that 42% of SMEs believed an increase would be unaffordable, so it’s likely the amount of borrowing will decrease in response. But this is also risky, as the investment could be required to grow their business.
There’s no one-size-fits-all solution to negate the effects of the interest rate rise, but one potential option is to borrow finance from other sources. These include investment funds and swap products. There have been mis-selling scandals around the latter in particular, so many SMEs are understandably cautious about going down this route.
When borrowing, you’ll want to ensure that your business is seen as one that’s safe to lend to in order to increase the likelihood of securing finance. Your company’s credit score should be the best it can be – paying your existing loans on time can make a big difference.
Keep on top of your finances
Sorting out your finances can prove problematic unless you’re an accounting expert, but an understanding of your cash flow is important in order to demonstrate your level of risk and protect your business from the effects of future interest rate increases. Outsourcing your accounting to a specialist like Nabarro Poole could be the solution you’re looking for.
We take a forward-thinking approach by budgeting, forecasting and completing monthly and quarterly accounts. We can also help with tax planning, and offer a range of cloud accounting software to keep you up to date with what’s coming in and out as it happens.
To discover more about how Nabarro Poole could assist with your finances, get in touch today.