Navigating the Interest Rate Increases: 3 Strategies for Owner Managed Businesses

How do you deal with the latest interest rates rise?

On the 3 August 2023 the Bank of England (BOE) raised the base rate from 5% to 5.25%. The markets are currently predicting that rates will peak at 6% by the end of 2023 before slowly falling back over the next five years to around 3.7%, but in reality, no one really knows.

It’s a far cry from as recently as March 2020, the base rate was as low as 0.1%, so I think it’s safe to say that the age of cheap money is over for the time being. The Banking & Finance Team at MHA have seen rates rise in Asset Finance, as an example, by around 3.5% (to 8-10% APR) on average, when taking into account all the consecutive rates rises, but what is the likely effect on Owner Managed Businesses (OMB’s) likely to be?

It’s not rocket science to say that higher rates mean higher borrowing costs. As small businesses are often dependent on external finance for growth and investment, the increased cost of borrowing makes it more difficult for small businesses to build up the capital they need to thrive.

So, along with the higher costs caused by inflation and rising interest rates it means that consumers and other SME’s may have less disposable cash, leading to them spending less. This will affect a business’s top line revenue. Couple this with rising stock, material and delivery costs, it could also affect both a business’s Gross Profit Margin, but more worryingly in the short term, it could put a squeeze on working capital.

Here are three areas for businesses to consider to help shield/steer them through interest rate increases.

Assess the type and levels of your debt?

Businesses should check how any existing debts or credit facilities will be affected by rate rises and be aware of the risks of overextension when borrowing in an environment conducive to rising rates.

Cashflow wise the current school of thought is that a business should have around 12 months of cashflow available, so if you are looking at borrowing, getting a fixed rate loan or flexible line of credit would be the most sensible options from my point of view. Avoid increased opting for shorter-term loans tied to cash flow will present greater risks.

Though it might seem counterproductive to take out a business loan or line of credit when interest rates are increasing and borrowing is becoming more expensive, if you know you’ll need to borrow acting now will mean you potentially can lock in your rate to keep the cost of borrowing relatively low.

Are you keeping an eye on your supply chain?

If prices increase, or payment terms and accounts payable change, companies need to be aware that while they might be relatively insulated, their key suppliers might not be.

Even if your company has no funding affected by interest rate changes, your suppliers may do, and your costs may increase to cover higher interest charges.

Interest rate rises can force a company’s hand, with inflation driving up the pricing of manufacturing, distribution, and business services, which then trickles down the business supply chain.

So having contracts in place to fix supply prices can mitigate this risk and help you budget.

Time to tighten up your credit control?

Cash is the lifeblood of the business, so it must be treated as such.

In the current climate it’s more likely that we’ll see businesses going through some form of insolvency process. By implementing regular robust controls now, you can avoid the pain of late payers and the risk of writing off bad debts later.

Effective credit control can be achieved by implementing procedures to ensure regular review and persistent chasers. Credit control is simply – consistent, persistent and polite payment reminders issued to your clients. It doesn’t matter if they are verbal, written, or automated – or a combination of both, so long as you actually have a credit control process in place.

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As interest rates continue to rise, it's crucial for businesses to take proactive steps to mitigate the potential negative impact, to navigate through these challenging times. Take action to protect your business from the impact of rising interest rates. Assess your debt, monitor your supply chain, and tighten up credit control. By proactively addressing these areas, you can mitigate risks, safeguard your cash flow, and maintain financial stability. Don't wait for the effects of higher borrowing costs to hinder your growth. Act now and position your business for success in an evolving economic landscape.