How rising interest rates are affecting small businesses

The UK is currently facing a cost of living crisis. With inflation at a 40-year high, the Bank of England has taken steps to combat this, raising interest rates in a bid to get inflation under control. Here, we look at the relationship between inflation and interest rates, what higher rates mean for business owners, and the steps you can take to protect your business.

Why are interest rates rising?

The reason behind rising interest rates is increased inflation. Last reported as 8.7% in April, our current high inflation is caused by prices increasing quickly worldwide, due to a greater demand of goods following Covid restrictions and the impacts of the Russia-Ukraine conflict.

As the demand increases, businesses are struggling to get enough stock to sell, leading to consumers chasing a shortage of goods, which then causes prices to trend upwards.

One way of combating high inflation is to raise interest rates. The Monetary Policy Committee (MPC) is charged with setting the Bank of England base rate in order to try and keep inflation low and stable. Since inflation started to balloon in December 2021, the Bank of England has increased interest rates twelve times. As of June 2023, the base rate sits at 4.5%, and it’s expected to rise again in the coming weeks.

What does this mean for small businesses?

High rates mean higher borrowing costs. As small businesses are often dependent on external finance for growth and investment, the increased cost of borrowing makes it more difficult for small businesses to build up the capital they need to thrive.

In addition, higher costs caused by inflation and rising interest rates also mean that consumers have less disposable cash to spare, leading to them spending less. This then affects a business’s revenue, creating additional pressure on top of rising stock, material and delivery costs.

How can you protect yourself from interest rate increases?

Amend your business plan accordingly

You could check how any existing debts or credit facilities will be affected by rate rises. For instance, as interest rates rise, the cost of borrowing through your business credit card may increase as well, so be mindful of the risks of borrowing too much. You may only end up paying off interest on your credit cards, rather than the balance itself.

In addition, you could look to manage the impact this may have on your supply chain as well. You could try to negotiate new payment terms with your suppliers and partners, or look to bulk buy materials and stock to avoid having to use credit for these purchases.

Preserve cash flow by limiting spending

One of your most precious assets as a business is your cash flow, but with higher interest rates pushing up your variable costs, such as credit cards, it might be harder to preserve cash flow. You could shop around to try and get a cheaper plan for your business credit card, or alternatively look for other sources of finance, like a fixed rate loan or flexible line of credit — more on this below.

You can also look to reduce your fixed overheads, like by subleasing your office space if you own it outright, or by reviewing staffing costs. You can find more suggestions on how to reduce your business costs here.

Get a fixed rate loan or flexible line of credit

Though it might seem counterproductive to take out a business loan or line of credit when interest rates are increasing and borrowing is becoming more expensive, you do have options. For instance, all of our business loans at Funding Circle are offered at fixed rates for up to 6 years, meaning that if you borrow now, you can lock in your rate to keep the cost of borrowing low.  Find out more about how a business loan could help you to reduce costs here.

In addition, a flexible line of credit could be another option to give you access to the cash flow you need. FlexiPay, our new line of credit service, allows you to spread the cost of a bill or invoice over 3 months, giving you flexibility in your cash flow. It’s free to set up, there’s no annual charge, and there’s also no interest to pay — you’ll simply pay a flat fee on each invoice.

14/06/23: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.