Protecting your firm against raising rates
5 February 2018
In November, the Bank of England raised the base rate for the first time in a decade, shifting it up from its rock-bottom low of 0.25 per cent back to 0.5 per cent.
The consensus view is that the central bank will introduce another interest rate rise at some point this year, particularly as inflation continues to sit above the two per cent target.
But given that we have just got used to interest rates sitting around the 0.5 per cent mark, it’s inevitable that another rise might come as a bit of a shock to some businesses.
Most business owners will use some form of finance to fund and grow their companies, and a further increase could therefore hit small businesses hard if they have to fork out more money to borrow. Not only could this erode the amount of working capital you have, but your entire business strategy could be affected, particularly if higher loan payments end up stalling your growth plans.
So what measures can businesses take to protect themselves from these hikes?
One way to manage your outgoings is by fixing your costs – whether that’s securing a deal on your commercial mortgage, so you can benefit from the current low interest rates, or fixing a longer-term deal on the amount your suppliers charge.
Late payments are already an issue for many small businesses, who often find themselves at the mercy of big corporations that fail to pay on time. But higher interest rates could exacerbate this cash flow problem further. While the UK’s Federation of Small Businesses has recently called on the government to clamp down on large companies that take advantage of smaller suppliers, it’s unlikely that action will be taken anytime soon. So, in the meantime you should look at bridging the gap that might be left.
One way to tackle this is by exploring options such as alternative finance, which could provide you with short-term cash flow opportunities, so you aren’t left with large holes in your finances when payments you are due aren’t received on time.
Peter Alderson, managing director of business finance provider, LDF explains:
“Cash flow really is king, it’s an old adage, but an accurate one. Businesses can’t avoid changes in rates, in legislation or the potential seasonality of their trades, but they can look to implement options to help smooth these pinch points. Finance can really be a positive lever for that.
“There’s a misconception that finance is for failing business, when in fact it’s the complete opposite. Finance has become mainstream due to the flexibility it can offer businesses in navigating changes and supporting ongoing development.”
Now is the time to look at your entire debt picture and consider if you have opted for the most suitable types of credit for your business. Lenders will alter their deals in light of interest rate changes, so have a look at all the options available, and don’t ignore smaller financing firms which might have more flexible options available.
While you should continually review your business model to ensure it’s as cost-effective as possible, now might be a good time to cut any unnecessary costs. You could even consider installing tech or automated processes to make your business more efficient.
Of course, finance offers a flexible way of spreading the cost of investment, largely negating the initial outlay and for small businesses, which Alderson describes as a “game-changer”.
Businesses are becoming much more aware of what they need to do to compete in a more technology-led landscape and as such, they are accelerating plans to make their operations as effective as possible.”
Ultimately, the trick is to make sure you are prepared.
Don’t let interest rate hikes tip you over the edge.