Rising Interest Rates: What It Means For Your Business

It’s been quite a whirlwind since the pandemic faded from the forefront of our news. Russia’s invasion of Ukraine, a new Prime Minister, the loss of our Queen, the cost of living crisis, and now lots of talk about the Bank of England interest rates and where it might be heading.

But what exactly does a higher interest rate mean for businesses? Why is it happening? Is it all bad? We’re going to explore all of this in today’s article, so keep reading as we dive right in.

Why Have the Interest Rates Gone Up?

Higher interest rates are often a direct response to inflation. Inflation is when your money doesn’t go quite as far as it did previously. Because of the Russian invasion of Ukraine, gas costs have gone up, as has the cost of food. 

Inflation affects the lower earners most, because often, budgets are already stretched. The current inflation rate is 9.9% – meaning that on average, things are costing 9.9% more than they did last year. The Government’s target is 2%.

The way the Bank of England attempts to slow down inflation is by increasing interest rates. This will encourage people to borrow less, spend less, and save more, which in turn slows down the increase in the cost of living. 

I Run My Own Business, What Does It Mean For Me?

Interest rates affect businesses in a number of ways, both in how the business spends and borrows, and how consumers interact with businesses. Let’s take a look at some of the impact of a higher interest rate.

Cost of Borrowing

If your business has a loan, credit card, or other types of borrowing with a non-fixed interest rate, you’ll find that your repayments are likely to increase. 

It may not be the best time to plan to grow your business substantially, due to the fact that borrowing is becoming more expensive, and higher repayments on existing borrowing can eat into your profits.

Ease of Borrowing

Not only may you be less inclined to borrow, but banks may also have stricter requirements to meet before they agree to lend. 

While higher interest rates mean more profit for the banks, there’s also a higher risk in lending so you might find that there are a few more boxes to tick before you can secure additional funding.

Consumer Habits

As we mentioned above, increasing interest rates is a method of encouraging consumers to borrow less, spend less, and save more. As a business owner, this could have an impact on new and recurring business. 

However, this short-term dip in sales might resolve itself in the long term, as people who choose to save may spend those savings when interest rates start to lower again.

Do You Need Help With Managing Your Business’ Finances?

At times like this, it can be overwhelming trying to decide what’s best for your business. If you’re looking to grow, you may need to borrow, but with climbing interest rates you don’t want to affect your profits too much.

Countplus is here to help. We have a team of experts who can help you move your business forward, and take some of the weight off your shoulders. We can help you manage your finances, meet HMRC deadlines and focus more on what you love.

Get in touch today to find out more about how we can help.

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