Are you ready for higher interest rates – and is there anything you can do to cushion the blow?
Adam Aiken takes a look
Interest rates have been at a historical low of 0.5% for more than half a decade. There have been suggestions at various times during this period that rates are about to go back up, but these have all been false alarms – so far.
However, there are whispers once again that a rise in base rate is imminent, and that means businesses with borrowings need to be prepared.
Despite the woes that businesses have found when it comes to bank financing since the 2008 crash, many of those that have successfully borrowed money have done so at very cheap rates. According to the Institute of Chartered Accountants in England and Wales (ICAEW), there are 1.6 million businesses that have been established while interest rates have been at 0.5%, and, crucially, these businesses have no experience of operating in a world with higher rates. ICAEW has also found that nearly two thirds of businesses have not put any measures in place to deal with rising interest rates.
Although you won’t be able to prevent a rise, there are a few basic things you can do to make life easier when it eventually happens – and it will.
As with a domestic mortgage, consider shopping around for a new deal on your borrowings. You might be able to find a fixed rate deal that will charge you a little bit more than your current rate, but which will cushion you from the effects of any baserate rises.
What if you don’t rely heavily on borrowings? This doesn’t necessarily mean you are out of the woods. A rise in rates will affect everyone, not just you. Research by Company Watch suggests that one in five businesses uses more than 90% of its operating profits to meet interest commitments.
So even if you’re prepared for a base rate rise, you might have customers and suppliers who aren’t. Keep an eye on them and look out for signs that they’re struggling.
Meanwhile, consumer spending could also take a hit if the base rate goes up. Personal and consumer debt is more than £1.4 trillion and many people will struggle when the cost of their borrowing rises. As a result, there are likely to be few, if any, businesses that will not be impacted at all when the Bank of England eventually makes its move.
However, if you have been thinking about making further investments, now might be the time to act. Lenders themselves will be preparing for a rise, so you are unlikely to find finance deals as cheap as they once were, but looking to secure your funds now is likely to prove cheaper than waiting another year if the expectations are correct.