How will rising interest rates affect clients and businesses?

Rates are at their highest since 2009 and threatening to combine with inflation to create a gloomy outlook.

For the first time in thirteen years, interest rates have reached 1% to try to counter rising inflation. This week inflation hit a 40-year high of 9%, and the Bank of England has warned that it could pass 10% by the end of 2022.

Since December, interest rates have increased three times: 0.5% in February, 0.75% in March and now, 1% in May.

Increasing interest rates are an attempt to encourage people to spend and borrow less, which in turns pushes down the rate of inflation. Yet higher interest rates inevitably have a significant impact on businesses – SMEs in particular – who have a difficult balancing act between raising prices to maintain profit levels while retaining customers and paying decent wages.

Interest rates increases are likely to affect:

• Loans and mortgages.
• Profit margins.
• Cost of goods, materials and services.
• Wages.
• Overall standard of living.

We spoke to several accountants across the UK to gauge their reactions on the latest rise and how it’s affecting their clients.

Bank of England say it’s a short-term squeeze but we are not so sure

Dominic Bourquin, partner, Monahans

Clients are concerned that with costs increasing and customers being unwilling to have those costs passed on to them, margins will be squeezed. An increase in borrowing costs is the last thing they need.

Businesses that rely on short-term financing, such as overdrafts, to overcome cashflow shortages will inevitably see an increase in their borrowing costs, especially over the coming months with markets expecting further rises to take base rates to 2.25% by the end of the year.

The Bank of England talks as if this is a relatively short-term squeeze on businesses and individuals, but with inflation set to hit 10% by the end of the year and a clear upward trajectory for interest rates, we are not so sure.

Next steps: A well-managed debtor book will be essential in the coming months. This is to ensure:

• Customers pay within their credit terms.
• Stragglers are followed up for payment in an orderly manner.
• Credit terms are not extended to those businesses without the requisite credit history to mitigate the risk of bad debts.

Also, implementing a monthly cash forecast to monitor pinch points and when short-term financing might be required will also be critical to ensure that businesses manage their cash effectively and keep their borrowing costs in check.

Verdict: Bank of England say it’s a short-term squeeze but we are not so sure.

Interest rate hikes have come at a bad time for many struggling businesses

Lauren Harvey, assistant accounts manager, The Accountancy Partnership

It is highly likely that the cost of business will increase, especially for companies that have taken out non-fixed rate loans or credits. Businesses are just starting to recover from the pandemic, and many will have relied on loans to cope throughout it, so the interest hike has come at a really bad time for many who are already struggling to stay afloat.

In addition to interest rates, businesses are contending with National Insurance increasing, raw materials getting more expensive and the ongoing crisis around fuel and energy prices.

Next steps: Careful cashflow management will become much more crucial than ever. In some cases, there sadly simply won’t be enough cash to manage. However, business owners can give themselves the best chance through detailed financial reporting which will improve the way cash flow is managed and help them make the best decisions at the best time.

Verdict: Interest rate hikes have come at a bad time for many struggling businesses.

Businesses with debt facilities on variable rates will be most affected, making it harder to repay loans and raise funds

Laura Leslie, corporate director, DSG Chartered Accountants

Interest rate is at the highest point it has been in several years. From rising costs to a potential change in consumer spending, this is continuing to put a squeeze on businesses.

In the longer term, the purpose of the interest rate rise is to offset the increase in inflation, which – amongst other price rises such as energy costs – is leading to the cost of living increase. As interest rates rise, it encourages less spending and borrowing, which means the inflation rate will start to fall back to a lower level.

If consumer spending slows down, this may impact some businesses, especially at the luxury end of the market, but it is unlikely to have a material effect in the short term. More likely, the cost to businesses is likely to be on those that have debt facilities on variable rates. This will affect bank loans overdrafts and lines credit – and it might also make fund raises harder for capital spend and the cost of repayments significantly higher.

Next steps: Companies should ensure they review their banking facilities and forecast any interest rare increases into future cash flows. They should also review when any fixed term interest rate periods are coming to an end.

Verdict: Businesses with debt facilities on variable rates will be most affected, making it harder to raise funds and repay loans.

Annie Makoff is a freelance journalist and editor.