What could an interest rate change mean for my business?

UK interest rates are at a record low of 0.1% at the moment, but this looks set to change at the upcoming meeting of the  Bank of England’s Monetary Policy Committee. The MPC meeting, which will take place on Thursday November 4th, is expected to announce a rise in interest rate to counteract inflation.

This article will look at the current UK interest rate and how rising rates might affect your business. We’ll cover a range of topics, including:

• Defining interest rates
• The current situation with UK interest rates
• What the interest rate change means for small businesses

Interest rates are a huge part of borrowing and saving money. Basically, almost any loan you take out will have an interest rate attached. This is true for both personal and small business loans. 

As time passes, your loan will accrue interest, and you’ll eventually need to pay back more money than you initially borrowed. Interest is like the price you pay for ‘hiring out’ a loan provider’s money.

Similarly, you’ll gain interest on any money you have in a savings account. A bank will pay an individual a certain amount based on how much money they’re holding with the bank. Banks make money by charging higher interest rates on their loans than they pay with the interest rates on their savings accounts. 

In the UK, the most important interest rate is the Bank Rate. This is the interest rate that the Bank of England charges high street banks to borrow money. 

If the Bank Rate increases, all interest rates on loans will increase because a higher Bank Rate makes it more expensive for high street banks to borrow money. To continue running despite the increased expense, the high street banks charge their customers more to borrow money.

The announcement on November 4th is to see if the Bank Rate will increase. It’s currently at 0.1%, which is a record low. The rate has been this low since March 2020, when it was reduced in response to the COVID-19 pandemic. 

A lower interest rate tends to increase consumer spending and the rate at which people borrow money, so it’s good if a country’s economy is struggling like the UK was during COVID-19.

The Bank of England is looking at increasing the interest rate because of inflation. This is the rate at which prices for goods and services increase year to year. Inflation has climbed to 3.1% this year, much higher than the Bank of England’s target of 2%. If inflation gets too high, prices for goods will increase faster than wages, and money will lose its value. 

People typically borrow less and save more when interest rates increase because the interest rate paid to savings accounts increases. The amount of money people spend overall also tends to be less, since higher interest on business loans forces companies to charge more for their products. 

Less spending and borrowing means less cash flowing around in general, which means money’s value increases and the inflation rate goes down. 

Perhaps the biggest impact of increasing interest rates is that the repayments for any loans you previously took out for your business will increase. Your financial planning should take potential interest rate changes into account, so you’re not at a disadvantage if the rate increases. 

Even if you have no existing loans for your business, you may have planned to take one out. If the interest rate increase makes it too expensive to take out and repay a loan, remember that there are other methods of getting cash for a small business. Look into things like government grants and angel investors.

It may be that your business seems entirely unaffected by an interest rate increase. While this would be ideal, it’s likely that you’ll still feel the impact indirectly. 

If any of your suppliers now have to pay higher interest rates on their loans, they may need to increase the prices of their products to continue running. Manage your inventory more carefully to account for this —  if you use your supplies as normal, you may find a significantly bigger bill when it comes time to restock. 

A higher Bank Rate means higher interest rates for personal loans as well as business ones. This means your customers may need to set aside more money to pay back their loans instead of buying your products and services. 

If you’re calculating a sales forecast, account for any interest rate changes, as they can cause a significant drop in sales. You might also need to reduce your prices to convince customers to continue purchasing your goods.

You’re likely to feel some of the impact of an interest rate change, no matter what industry you operate in. This is due to the influence of your customers: a decent number of them will be financially affected by rising interest rates, which will change their spending habits. Higher interest can mean less shopping for many consumers. 

To ensure that your business doesn’t suffer from the interest rate change, you’ll need to keep a close eye on your income and your accounting. You need to be able to spot any significant trends quickly. This is much easier when you use an app like Countingup, which gives you real-time insights into your cash flow so that you can always keep on top of your finances.

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and live cash flow insights, you can confidently keep on top of your business finances wherever you are. 

Find out more here.