With further rises in interest rates predicted and throughout 2023 and speculation that the Bank of England may need to hold rates as high as 5.25% until the second half of 2024, how should small businesses react?

Why are interest rates rising?

Raising interest rates makes financial commitments from mortgages down to your phone contract, more expensive. This means consumers have less disposable income, so they reduce discretionary spending on less critical items, which is when businesses start to get hurt.

Five effects of rate rises and what you should do:

1. Reduced consumer spending – When customers tighten their belts, certain sectors feel it first. Hospitality feels the pinch as consumers spend less on eating and drinking out. They also hold back on major purchases which means anyone involved in the supply chain sees a slowdown.

What to do? – Consider whether your business can adapt to serve customers less affected by the economy, or appeal to new segments where demand still exists. Do you offer something that others do not? Boost your marketing efforts to make sure you capture the demand that does exist.

2. Less demand but fixed costs – Many businesses are tied-in to service contracts that may be beneficially low right now or, like energy costs, may be difficult and high.

What to do? – Whenever a contract comes up, hunt around for the best deals and negotiate as hard as you can. Can you work smarter, be more productive or save costs by being energy efficient? Can you generate additional income from what you have? Evaluate every opportunity you can think of to see if you have cost-effective options to increase your income streams.

3. Higher supply-chain costs – From animal feed to timber, food ingredients to fuel, almost every component or ingredient is increasing in price.

What to do? – A tricky issue because switching to cheaper ingredients or components often means lower quality which means a worse product and likely less customers. Try to buy in bulk to negotiate better deals, consider contacting other businesses that might use the same materials and order together to increase your buying power.

4. Late payments from customers – If you sell to other businesses, when they start to struggle, an early sign is late payment. In turn this means your own cashflow is restricted, you might not have the capital to place further orders for materials or you can't pay other suppliers on time, causing not only a spiral but a negative effect on your credit rating.

What to do? –Communication and the strength of relationship with your customer are key, because if a legal situation was to occur you may be well-down the pecking order. Payment plans or staged payments make sense if any issues are temporary but being over-accommodating can mean you miss out on vital cashflow. Don't over commit yourself to forward orders if you think this is a risk.

5. Restricted access to funding and more expensive finance – Business to business lending rates are quite varied, affected by the trading situation and trend of the business, assets held, cash at bank, payment reliability etc as well as the credit history of the directors themselves and perhaps other businesses they own. Facilities with variable interest rates are ones to look out for. Credit cards and overdrafts for example may be able to increase their rates quickly with little warning to yourself.

What to do? – Whilst it may seem counter-intuitive, if your business needs finance, The British Business Bank suggests businesses explore fixed-rate, flexible and alternative funding options.

• Locked-in rates over a number of years offer certainty and protection against future rises.

• Funding from lenders with flexible criteria provide access to funds not available from traditional banks.

• Flexi-loans also allow a loan to be paid off as soon as you like, in order to reduce interest payments.

So how should your business react to interest rate rises?

Review your business plan and work out what to do in different scenarios. Make sure you know your balance sheet, where your most profitable income comes from and where your risks are. Control costs, look for efficiencies then try to boost your brand presence. Pick up new or different customers, or diversify activities to broaden your income streams.

In the end you may need to adjust your prices, passing some of the increases on and the sooner you get customers used to it, perhaps the better.

To explore your funding options, talk to Portman. We can discuss fixed-rate agreements that give you budgeting certainty, or flexi-loans that allow you to reduce the amount of interest you pay by settling early with no fees.

Visit us at www.portmanassetfinance.co.uk