How do high interest rates affect businesses?
By Mr Bankruptcy
23rd May 2023
With the Bank of England announcing that interest rates are rising again, to 4.5%, businesses must be cautious of the potential impact on them.
Historical interest rates and what they meant
The 0.25% increase in the base rate that was announced by the Bank of England on the 11th May was the 12th consecutive rate rise since December 2021, making the current interest rate the highest it’s been for almost fifteen years.
Interest rates are being raised to control inflation, which currently stand at 10.1%, but the last time that interest rates were at a similar level, the UK was on the brink of a recession that saw the number of business bankruptcies increase significantly.
While the UK continues to avoid recession, there are concerns that increasing interest rates will have a negative impact on many businesses. A report in the Business Leader suggested that when rates rose to 4.25%, 22% of businesses “do not have the tools to deal with another interest rate rise”; we have now entered that territory.
The impact of increasing interest rates
It’s important to understand how changing interest rates affect our finances so that appropriate adjustments can be made:
- More expensive loans. Businesses with existing loans will likely find their repayments increasing. For those looking for a loan, it may become harder to borrow and the cost will be higher. Businesses that may have been planning to pay back loans quickly could struggle to do so, and margins will be reduced as costs increase due to more expensive business loan repayments.
- Consumers spend less. With the cost of credit increasing and the cost of living rising, people will spend less. They will be more particular about where and how they spend their money, focusing on necessities, so business may see their income reduce.
- Supply chain costs increase. As costs increase across the commercial world, businesses may see them passed on by others through their supply chain, again decreasing their own margins.
- Slower growth. Businesses no longer have money to invest, which can stall plans for growth. The Financial times reported that investment is lower by 8% compared to where it would be if interest rates had stayed the same.
How to combat rate increases
Businesses need to review costs and budgets and be prepared to adjust their plans accordingly to minimise the impact of increasing interest rates. Where they have serious financial concern, seeking expert help quickly can ensure that they have a plan in place to manage the financial challenges ahead.
James Rosa Associates
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