Interest Rates Predicted to Hit ~6% – What does this Mean for Small Businesses?

Rising interest rates have been dominating the news cycle recently, causing small business owners to worry. Since the exact figure and timeline for the rise is still unknown, it can be difficult to fully gauge what the impact will be and what you should do. Unfortunately, the proposed rise also comes at a time when businesses are struggling with high costs and poor growth, meaning it risks intensifying existing problems even more.

Understanding the reasons why rates could change and what your options are can help to insulate your business and keep your finances in check. That’s why, in this article, we examine why interest rates are rising, what the rise could mean for your business and some steps you can take to protect yourself.

Why Are Interest Rates Rising?

Interest rates are rising because the economy is experiencing high levels of inflation. Inflation is where the cost for goods and services increases over time — a little is good, but too much, too quickly can destabilise the economy. This year, inflation has been particularly high for a variety of reasons. Economic adjustments after the COVID pandemic, the war in Ukraine, recent statements from the UK Government, and more, have all contributed to the inflation situation. As a result, we’ve seen the cost of energy, food, timber, second-hand cars, and lots of other goods increase dramatically.

If you’d like to learn more about inflation, you can read our CFO explaining how inflation affects small businesses. One particular consequence is a rise in interest rates. Inflation and interest rates typically go hand in hand, so when one changes the other does too. The Bank of England (BoE) is tasked with trying to keep the economy stable and limit inflation to around 2%.

One approach the BoE can take to limit inflation is to increase the cost of borrowing and reduce the amount of money in the economy overall by raising interest rates. It’s hoped that lenders pass on this cost to businesses and consumers, tempering spending habits and decreasing inflation.

When Will Interest Rates Rise and What Will the Rate Be?

The Bank of England has already raised interest rates seven times this year, making regular adjustments as the UK deals with record inflation levels. The BoE’s next planned review of its interest rate is (at time of writing) 3 November. Of course, the BoE may decide to increase interest rates sooner, which is why it’s important to keep an eye on the news, so you’re ready to respond when it happens.

No one, other than the BoE, knows what the forthcoming interest rate will be. Economists disagree on the exact figure, but estimates suggest the Bank of England’s base rate could reach 6% (currently 2.25%). The interest rate (sometimes called the ‘bank rate’) hasn’t been that high since 2007 and has spent the vast majority of the last decade under 1%.

Such a steep increase will likely have a considerable impact on your business strategy. You may even be noticing customers or fellow businesses already changing their spending patterns in anticipation of the rise. So that you’re fully prepared, we’ve summarised some of the main consequences in the next section.

What Are the Implications for SMEs When Business Interest Rates Rise?

Changes to interest rates affect different sectors of the economy. Internally within your business, interest rate increases could see you paying more on your debts (like mortgages, credit cards and business loans). This would increase your overheads and put pressure on your cash flow, making it harder to invest in growth opportunities. What’s more, you may only be able to pay the interest back on your loans or pay less on the principal sum (depending on your loan type).

It’s also worth noting the external impact to your business: any rise in interest rates also affects your suppliers’ and customers’ finances. For example, suppliers may ask you to settle invoices faster than usual or make changes to their delivery times since they borrow to fulfil orders in the short-term. Similarly, fewer customers may qualify for financing on your goods while others will adjust their spending to save money for their bills.

Generally speaking, any key variable on your balance sheets, such as sales, labour or supply costs, could be impacted by the rise. However, there are upsides to look forward to. Rates on savings accounts should, in theory, also go up. That’s why now could be a good time to explore alternative financing options with fixed fees, so you’re not caught out by sudden interest rate hikes.

What Types of Small Businesses Could Be Most Impacted by the Rise?

According to the  Federation of Self Employed & Small Businesses’ latest Small Business Index, 89% of small businesses are struggling with record costs.

With interest rates predicted to rise, some of the most heavily affected sectors will be those tied directly to mortgage markets, like construction and home renovation. However, the rise in interest rates affects borrowing more generally, so businesses that typically have high start up costs and debt (like manufacturing and IT) will also experience the effects. What’s more, customers’ disposable income could decrease, meaning hospitality and entertainment businesses may take a hit, too.

Ultimately, all industries are impacted by the so-called ‘Cost of Doing Business Crisis’, which comes at a time of slow post-pandemic recovery and a looming energy crisis. That’s why it’s crucial to carefully plan the next steps for your business and find ways to limit your exposure to any interest rate increase now or in the near future.

How Can SMEs Mitigate the Effects of Rising Business Interest Rates?

With lenders pulling mortgage deals and readjusting their rates in anticipation of an interest rate rise, it can be difficult to know what you should do. Even though things are in flux and any announcement is still weeks away, there are a few measures you can take to help insulate your business.

One essential step is to start forecasting your cash flow. Doing so will let you know how much liquid cash you have available if an unexpected bill comes in and help you identify which of your revenue sources are your most reliable. These same revenue sources could take priority as you try to grow your business, so taking the time to identify them now can pay off.

You should also consider reaching out to your suppliers and ask if they’re changing their payment terms or operations. This will not only let you anticipate any forthcoming changes about invoicing or delivery times, but also let you show you’re a considerate business partner. With luck, they’ll be more agreeable should you ever need extra time to settle an invoice.

You can also look to alternative financing methods with fixed fees so you’re still able to invest in your business and capitalise on growth opportunities. For example, Merchant Cash Advances don’t have an APR or interest rate. Instead, they charge a fixed fee, which means your borrowing won’t become more expensive simply because interest rates change month to month.

Merchant Cash Advances offer flexible repayment terms, so you’re able to manage your money more effectively and avoid the stress of immovable revenue targets. Merchant Cash Advances also benefit from quick approval times and don’t need a business plan or collateral as part of your application.

Access Reliable Financing Support with 365 finance

At 365 finance, our top priority is the continuity of your business. That’s why we offer revenue-based financing options with manageable payment terms. Repayments are always based on your monthly income, so you don’t need to worry about falling behind if your monthly sales happen to dip.

We offer up to £400,000 in revenue-based financing, so your business can thrive all year round. Applications have a 90% approval rate and are processed in as little as 24 hours. Speak to our team to find out how we can help your business and apply today without affecting your credit score. To find out more, head to our website.