Part 1: The Interest Rate Increase & What It Might Mean For Your Business

In its plain English terms, a rise in interest rates sounds dire, perhaps even critical. But it might not be as black and white as it seems.

Theories about a post-COVID economy have been circulating for nearly as long as we've been in a pandemic, but with news of rising living costs hitting the media - and now our pockets - it seems theories are becoming reality.

The Bank of England's decision to raise interest rates is directly linked to inflation rates - which are currently deemed much higher than our UK national target of 2%. For consumers, food prices, energy prices, and even the housing market have been top of mind. But what about businesses? What impact could you see as a professional?

We’re here to help you unpack what the news means for your business.

Interest rates and business: what it could mean for you

With something as widespread as national interest rates, it will be difficult to avoid at least some impact on your business. The bad news? Startups, SMEs, and sole traders could be disproportionately affected by this.

Much like consumers looking to take out a mortgage or a personal loan, borrowing funds might be trickier in the coming years, whether that's to help grow your business or launch it in the first place. Banks will likely scrutinize loan applications much more, and resist lending on any terms they might deem 'too risky' - like to a smaller enterprise or an industry newcomer.

For businesses who already have loans, these increases could hit your assets right away and make it difficult for many SMEs and sole traders to repay more than simply the interest, meaning the actual loan goes untouched. And yes, that increases your risk of poor credit and might mean you'll struggle to secure bank loans in the future.

A loan with a fixed interest rate could help protect you and your business for the next 5+ years until things become a little more predictable. It will also make it easier for your long-term forecasting, including keeping a keen eye on your bottom line.

In the same way, establishing a fixed contract with any suppliers or vendors might help you solidify your supply chain at a time when this could easily become unpredictable. Of course, the downside is this may come at a higher price at the outset given your suppliers and vendors will also be trying to manage their capital security. But (and it's a big one) it will mean some consistency and reassurance for you.

Is it bad news?

On the face of it, rising interest rates don't sound particularly appealing to many of us - regardless of whether you're thinking with your business owner hat on, or your consumer.

So is it really all bad?

The answer depends on your current business objectives - and your priorities. Although it isn't a given, the good news is increased interest rates could also reflect in your business' savings growth as banks strive to give their customers better deals.

And if your bank hasn't increased its interest rates? A national rise could incentivize you to find a better rate elsewhere and on a fixed basis. Chances are this will require you to keep your money locked away for the next 5 years or so but you may see significant longer-term benefits if you do.

Will interest rates continue to rise?

Depending on the recovery of the world economy, it's possible that interest rates will go up again, yes. But at this stage of the game, it's difficult to say when this might be, by how much, or if they'll rise at all.

The bottom line is: the UK has seen varying interest and inflation rates throughout its recorded economic history, and while the circumstances of the past 2 years might make this instance feel more critical, it isn't necessarily the worst-case scenario.

The Bank of England currently predicts that inflation might reduce at the tail of 2022, with a more steady decline throughout 2023. If this is the case, interest rates might follow suit.

In the interim, protecting your business (and personal) assets will mean you not only minimize the impact this change has on your current trajectory but on your overall business growth for years to come.

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