Over the past year, the UK economy has seen interest rates soar to unprecedented levels. In October 2022, the rate reached 2.25%, the highest level for 14 years. In the months following, interest rates have continued to rise steadily, currently standing at 3.5% in January 2023. There are a number of reasons for this volatile economic climate – the lingering effects of the pandemic have weakened large parts of the economy, with this being catalysed by Russia’s invasion of Ukraine, and the consequent cost of living crisis that has been triggered as a result of the increased cost of energy, food and goods. If you’re a business owner then you’re likely to have concerns about how this will affect your enterprise. With this in mind, let’s take a look at the most important effects of high interest rates on businesses and how you can protect your company in the current economic climate.
Difficulty Obtaining Business Loans
One of the most significant effects of high interest rates on businesses is that it becomes harder to borrow money. This is because high interest rates make loans more expensive. An increase in the interest rate attached to a loan makes it harder to pay off debts quickly, as well as making it more difficult to take out new short-term loans to cover unexpected expenses or to expand your business. Higher borrowing costs can erode margins as well as prohibiting growth.
Decreased Consumer Spending
Rising interest rates don’t just impact businesses, they impact consumers too. They mean that consumers will have to pay more for their debts, meaning they’re likely to cut back on spending habits in order to pay off their current loans. In other words, they have less disposable income to spend on products and services. Businesses that deal with luxury goods and services are likely to be worse hit than those who provide basic staples, as consumers are assessing where they can reduce unnecessary costs in their lives.
Supply Chain Disruption
One of the potential indirect effects of high interest rates on businesses is disruption to supply chains. Businesses are likely to experience second hand effects caused by the increased prices of goods from suppliers. This may force them to increase their own prices and could cause difficulty obtaining the goods they need at the time they need them, and for the right price. The issue with this is that it becomes a vicious cycle – As the cost of products and services is increased, inflation is pushed higher, further reducing sales and injuring the economy.
How To Combat The Effects Of High Interest Rates On Businesses
Whilst there’s nothing that can be done to stop rising interest rates, business owners can take measures to limit the impact of this on their company. These are a few of the steps that can be taken in order to help protect your business:
Revise Your Business Plan
Assessing the levels of your debt in the current climate, look closely at whether your business objectives are feasible and will enable you to withstand the current challenges. Take a close look at your cash flow and capital in order to ensure you have enough to sustain you.
Keep An Eye On The Value Of The Pound
Rising interest rates can increase the value of currency which in turn can impact businesses that have income streams in foreign currencies. If this is relevant to your company, then looking at forward contracts could be a way to mitigate the risk of exchange-rate differences in foreign currency transactions.
Monitor Your Supply Chain
We mentioned a moment ago that one of the biggest effects of high interest rates on businesses can be supply chain disruption. With this in mind, it’s important to keep a close eye on your supply chain in the face of rising interest rates. You may find that suppliers increase their costs in order to cover higher interest charges. Trying to negotiate fixed supply price contracts can help to reduce the impact of this. It’s also important to have a contingency plan, should you face difficulty obtaining essential goods from key suppliers.
Contact A Business Rescue Expert
It’s a common misconception that business rescue experts are only there to help businesses that are failing. Whilst their services are utilised here, they can also advise on how to protect your company in times of economic crisis, in order to prevent your business from failing. Being proactive in seeking professional guidance at the first signs of trouble will enable you to put practical measures in place to protect your enterprise. Equally if you have major concerns about the health of your company in the current climate, a business rescue specialist can advise you on the best recovery options that may be available to your business.
Please don’t hesitate to get in touch with our experienced team at Ballard Business Recovery to discuss your individual concerns.
