12 December 2022

How to Survive Interest Rate Hikes as a Business Owner

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If you’re a business owner, you’re always on the lookout for ways to cut costs and increase profits. But did you know that there’s something else that can have a big impact on your bottom line? Interest rates. When interest rates go up, it can eat into your profits. But there are things you can do to survive an interest rate hike. The effects of high interest rates on businesses can be stark.  Here’s what you need to know.

What is an Interest Rate Hike?

The current increases in the UK interest rate are a response to our current high levels of inflation caused in large part by the war in Ukraine and post pandemic supply chain issues. The current rate of inflation is around 10%, well above the 2% target of the Bank of England. So, the Bank of England has increased interest rates to help curb this inflation. The aim is to ease inflationary pressures by slowing economic activity and slowing down demand.

How do Interest Rates Impact Investment and Business Decisions?

Put simply, if you have a lot of debt, an interest rate hike will increase your borrowing costs and make it harder to pay off your debt. This is because when interest rates go up, so do the minimum payments on your debts.

Investment often means borrowing, or in other words- debt. As an example, if you’re thinking of taking out a loan for your business, an interest rate hike will increase the amount of money you have to pay back. For example, let’s say you’re considering a £100,000 loan with an APR of 7%. If rates go up by 1%, your monthly payments will increase by about £140.

What is the likely Impact of an increase in interest rates on business demand?

With rising borrowing costs, consumer spending is already on the decline.  All of your customers are having to go through the same purchase decisions as you. They will be looking at where they can cut back without feeling the impact too much. If your product or service falls into that category, then demand for your service will decrease.

What Can I Do to Survive an Interest Rate Hike?

Revisit your business plan

In these uncertain times, it’s more important than ever for businesses to take a close look at their objectives and strategies. With the current headwinds, it’s essential to have a flexible approach and be prepared for every eventuality. Part of this is assessing the type and levels of debt you’re carrying as well as looking at how the business will manage a downturn in sales.

Part of reviewing your business plan is taking a look at your cashflow. Cashflow is THE best indicator of business future viability.

Clearview can help you to look at the impact of higher interest rates to your business. It does this by easily adjusting the inputs. For example, you may need to lower your sales revenue assumptions and increase your costs.

Pay off any debts

With loan interest rates for businesses set to increase, try to pay off any debt as quickly as possible before rates go up any further. Consider your bank overdrafts and company credit cards. Prioritise paying these off first if you can.  You may also want to consider transferring your balances to a 0% APR credit card or taking out a business loan with a fixed interest rate. If you can afford to pay off debts then this may be a sensible solution at this time, however delaying borrowing can also delay growth. Clearview can help you look at the impact of such decisions.

Reconsider your purchase and loan options

If you still decide to borrow during a time of rising rates, it’s important to be aware of the risks of overextension. Increased interest rates often see businesses opting for shorter-term loans tied to cash flow or options such as invoice finance. This can be a risky strategy with high interest rates.

Increased interest rates will also make you reconsider borrowing versus investing your own capital, and even with high interest rates there are pitfalls and benefits to both. This isn’t just about whether to buy or lease premises, interest rate increases affect all aspects of a company’s future investments from car leasing, to asset finance.  As a business owner you won’t want your business to sit still just because interest rates have increased, but you do need to take a more carefully calculated view. Clearview can help with making assumptions around borrowing and the effect it will have on your business.

If you’re still thinking of taking out a loan for your business, look for one with a fixed interest rate so you’ll know exactly how much your payments will be each month. You may also want to consider taking out a shorter-term loan so you can pay it off more quickly.

Whatever you decide to do, by taking a close look at your strategy and objectives, you can ensure that you’re in a position to weather any storm.

Keep an eye on your supply chain

As interest rates rise, companies need to be aware that their key partners (ie suppliers) might not be as insulated from the effects as they are. Even if your company is unaffected by interest rate changes, your suppliers may be, and your costs may increase to cover higher interest charges. Having contracts in place to fix supply prices can mitigate this risk. Nevertheless, interest rate rises can force companies’ hands, driving up the pricing of manufacturing, distribution, and business services, which then trickles down the business supply chain. By keeping an eye on your supply chain, you can adapt your business strategy accordingly and stay one step ahead of the game.

Conclusion:

Interest rate hikes can have a big impact on your business—but there are things you can do to survive them. If you have debt, try to pay it off as quickly as possible. If you’re thinking of taking out a loan for your business, look for one with a fixed interest rate or take out a shorter-term loan so you can pay it off more quickly.

The most important thing is to be proactive and plan your finances considering the worst-case scenarios. By taking steps now, hopefully you can weather any future interest rate hikes that come your way. Use sources like your bank and business advisors to help make these decisions with expert advice and consideration too, they can offer a range of solutions in business finance.