How can businesses cope with rising interest rates?

Higher costs of borrowing – as a result of the Bank of England’s decision to raise interest rates to 4.5% - will make it more expensive for businesses to finance their operations.

The bank’s Monetary Policy Committee (MPC) announced the twelfth successive increase in borrowing costs on 11 May, when it raised the base rate by 25 points to its highest rate since October 2008.

The impact of the rate rise will vary from business to business, with those relying on debt financing hard hit as their borrowing costs increase. Businesses with more cash on hand will perhaps feel less of an impact, though they could see their profits squeezed as they’re forced to pay higher interest rates on their loans. Sadly, those businesses already struggling with escalating borrowing costs, added to many other cost pressures, will be the hardest hit. 

The higher interest rates could lead to a slowdown in economic growth and businesses that rely on consumer spending will feel the impact of this as people will have less money to spend.

The Institute of Chartered Accountants in England and Wales (ICAEW) says the MPC risks overdoing the rate hikes as most of the previous interest rate rises are yet to pass through to households and businesses and this could “aggravate the cost-of-living-crisis”.

With this in mind, there are steps you can take to try to mitigate the impact of increased interest rates on your business, such as:

• Review finances – reduce debt levels by paying down loans or refinancing at a lower interest rate
• Improve cash flow – increase sales, look at ways to reduce costs or take steps to collect payments more efficiently
• Invest in efficiency - efficiency measures, such as automation or new technology, can help to reduce costs
• Diversify revenue streams – focus on growing your business by expanding into new markets or developing new products and services

While the Bank of England is raising interest rates in an attempt to control inflation, businesses could face a challenging economic environment in the coming months. Higher rates could have a number of unintended consequences and it is important to monitor the impact of the rate rises on your business and take steps where possible to mitigate this.