As the cost of living in the UK spirals, the Bank of England has raised interest rates to 1.25% – the highest rate for 13 years. It’s the fifth increase since December 2021 and will impact every part of the economy, from the housing market to pensions and savings.
But increased interest rates can also have a significant impact on small businesses. From potential dips in consumer demand to higher loan rates, companies must understand what an increased interest rate could mean for them in 2022.
What is Happening with Interest Rates?
The recent interest rate hike of 0.25 percentage points is just the latest in a long line of increases to help counteract rising inflation. In fact, for some of the bank’s policymakers, the 0.25-point hike was not enough – they campaigned for a 0.5-point increase.
Global banks have historically used interest rate increases to encourage saving and bring inflation down. Inflation has already impacted many businesses this year, driving up the costs of raw materials and changing consumer spending habits.
However, since the Bank of England’s rate increase, inflation has risen again to 9.1%. Not only does this spell more anxiety among consumers, but it’s a sign that potentially more interest rate hikes could be in the works in 2022.
What High Interest Rates Mean for Businesses
High interest rates can impact your business in several ways, but chief among these is that it will make borrowing more difficult.
For small businesses, loans, credit cards, and lines of credit are lifelines. However, when interest rates rise, banks are far more cautious about handing out business loans. In turn, this can impact how quickly you can grow your business and could put you under more significant financial stress.
Additionally, some businesses may have already accrued significant debt in the first few years of operating. In this case, interest rate increases can have an even more substantial effect – if you’re on a variable rate loan, your monthly repayments are likely to increase.
Difficulty borrowing and higher repayments drastically impact your cash flow, especially if you’re a startup. Businesses are also dealing with uncertainty around consumer spending (which is higher than last year but still suffering compared to pre-pandemic levels).
As a result, your business could be looking at making fewer sales this year and find it more difficult to find funding.
Our Advice
In times of financial stress, it’s vital that you limit unnecessary costs and be more cautious with your business spending. If you’re able to save a small proportion of your profits each month, your business will be more prepared for any further financial disruption in 2022.
According to the British Chamber of Commerce, 73% of businesses plan on raising their prices to combat increased interest rates. While this can offset increased costs elsewhere, you risk losing customers, who are also struggling with rising inflation – it’s up to you and your team to determine whether this gamble will be beneficial in the long run.
