How the Rise in Interest Rates Might Affect Your Business (2024)

This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.

Interest rates are set to rise for the 13th time in a row in an effort to combat rising prices. This series of interest rate hikes is a direct response to the cost of living crisis and aims to make borrowing money more expensive, leading people to have less to spend. In turn, the hope is that this will decrease consumer demand, therefore driving down prices.

In this article, we’ll discuss how the upcoming interest rate increase can affect your business, from higher supply chain costs to reduced consumer spending.

Why are interest rates rising?

Interest rate hikes are due to inflation. In April 2023, it was reported that UK inflation stood at 8.7%. This is partly due to higher demand for goods in the wake of Covid restrictions, as well as the impact of Brexit and the Russia-Ukraine war.

As demand for products increases, businesses have difficulty securing enough stock to meet the demand. This leads to a higher perceived value of the product, which is reflected in its price.

One way to curb inflation is to increase interest rates. This makes borrowing money more expensive, resulting in people having fewer means to buy products, reducing consumer demand for certain goods, thereby reducing the prices.

It is the Monetary Policy Committee (MPC) that is tasked with setting the Bank of England interest base rate. The rate is determined based on inflation. Since inflation began to increase in December 2021, the Bank of England has raised interest rates 12 times – most recently to a base rate of 4.5% – and are set to raise them again for a 13th time.

How rising interest rates impact businesses

Naturally, businesses are not immune to the ripple effects of rising interest rates. Below we’ll discuss some of the main impacts businesses will face when higher interest rates come into effect.

Harder to access credit: Inevitably, high-interest rates result in borrowing being more expensive. Businesses, especially startups and SMEs require financing in order to grow. This means that the increased cost of borrowing makes it harder for small businesses to get off the ground and access the capital they need to be successful.

Increase in supplier prices: Obtaining materials needed for production may also be more expensive as a result of suppliers increasing their prices. This often results in businesses having to increase their own prices accordingly in order to maintain the same markup.

More late payments: When interest rates increase, businesses tend to be under more financial pressure and experience strained cash flow. This can result in them making payments later, affecting the payee business’ cash flow in turn. Using efficient invoicing software like Square Invoices can help you to get paid faster. An efficient and comprehensive POS solution can also help businesses take customer payments from a wide range of payment methods – thereby boosting conversions and sales.

Less consumer spending: Higher prices due to inflation and rising interest rates mean most people have less money to spend on unnecessary goods and services. This means sales can be significantly reduced as customers choose not to part with their hard-earned cash on items they deem non-essential.

How to protect your business from rising interest rates

While higher interest rates can negatively impact businesses, it doesn’t have to spell disaster. Below are some tips for maintaining a healthy bottom line as interest rates go up.

Seek out fixed rate, flexible and alternative funding

Taking out loans with fixed rates up to 5 or 6 years can give you some cushioning against soaring interest rates. With a set rate for a certain number of years, you can more accurately forecast your finances and business plans for the near future.

Flexible and alternative funding may also be handy in the current economic climate. This includes flexible lines of credit that allow you to spread the cost of bills over several months, making it easier to meet payments.

Review your business plan

In light of a potential economic downturn, it’s always a good idea to revisit and potentially revise your business strategy and plan to see if it’s still applicable. This will involve evaluating any debt you have or expect to incur as well as potentially altering your desired financing channels.

Monitoring the value of the pound sterling

When interest rates go up, the value of a currency can also see an increase. Businesses that operate in different countries and have income streams in varying currencies should monitor the value of the pound against these foreign currencies as it will have a knock-on effect on profits.

Watch your supply chain⁠

If prices increase, it’s advisable that you keep an eye on any suppliers as, while you may be relatively insulated from the effects, this might not be true for your partners. Even if your funding is unaffected by changes to interest rates, your suppliers might be. This means they will need to increase their costs which often means you will have to as well.

Inflation and interest rate Q&A

What are interest rates?

Interest rate is the amount a bank, or other lender, charges an organisation or individual when they borrow money. It is typically expressed as a percentage and is noted on an annual basis, called the annual percentage rate (APR).

Why are interest rates rising?

When inflation goes up, interest rates typically follow suit. This is because lenders want to compensate for the anticipated decline in purchasing power of the money they’ll be paid in future. It can also be set by the national bank with the goal of driving down prices.

What support is there for businesses?

There is a range of ways businesses can receive support navigating high-interest rates and economic downturns. These include Government Start-Up Loans and funding, venture capitalist schemes and business loans and grants

How will interest rates affect my business?

Increases in interest rates make taking on debt more expensive. This means you’ll have to prioritise using cash to cover interest costs. This may result in you having fewer investment opportunities over time or cash flow issues. However, this is dependent on your business’s overall financial health.

Will interest rates go down?

It is very difficult to predict inflation and interest rates in the coming period. If inflation remains at its current level, the interest rate will likely stay the same for some time. This is because it wants to avoid boosting consumer spending which would cause inflation to soar to even higher levels.

To sum up, while interest rates are seeing further increases in the near future, streamlining your business plan and seeking out alternative finance can help offset some of the negative impacts of the economic trend.