How to combat the impact of rising interest rates on your business
The recent surge in interest rates should be a prompt for businesses of all sizes to review their existing funding arrangements and requirements.
Especially for those on variable rates, the cost of borrowing is increasing and what was once a competitive deal might no longer be.
Yet the full impact of rising interest rates extends much further than this, making it prudent for businesses to assess their current funding arrangements and wider cash flow requirements sooner rather than later.
Here are some of the main reasons why and areas to focus on.
Existing facilities may get more expensive to run
This is the most obvious and potentially damaging impact for businesses.
Repayments on any borrowing that’s on a variable rate are likely to have already increased to cover the higher interest. The majority of commercial mortgages, for instance, are on a variable rate, while business credit cards could also become more expensive where balances aren’t repaid in full each month.
Remember, however, that different lenders will increase their rates by different amounts. So it could be that like-for-like facilities are more affordable to run elsewhere, while other types of lending could be more cost-effective and provide better value for money – or come with additional benefits.
When it comes to remortgaging or refinancing, be mindful of any early repayment charges which could be due should you wish to do so. In some cases, however, it can be worth paying this to secure a better rate – or more suitable facility – elsewhere.
Rates may continue to rise
With interest rates widely expected to keep rising for some time yet, facilities which are available on the market today may be even more expensive in a few weeks’ or months’ time.
So if your business anticipates it may require a new or additional funding facility in the short term, perhaps to cope with the current challenges, it may be prudent to move quickly.
In the case of loans, for instance, interest rates are typically fixed for the entire term, protecting you from further rate increases and providing peace of mind and certainty when budgeting.
The key is to keep a close eye on your finances and cash flow forecasts to be able to identify where a shortfall may exist. This is especially important given the increased costs businesses are typically facing currently, and also if you’re expecting to make big investment decisions. High inflation is another reason it could be beneficial to accelerate any investment plans, as we covered in this article.
Is your cash flow protected?
It might be that your business is largely protected from the direct impact of rising interest rates, for instance if you don’t use external funding, or any facilities you do use are fixed for a long period. But given the interconnectivity and complexity of supply chains, there’s a chance you could be indirectly affected.
For example, any of your customers (or your customers’ customers) could come under increased financial strain as their own cost of borrowing rises. They may also be impacted by the range of pressures on cash flows currently, such as inflation and higher operating costs, which could affect their ability to pay your invoices on time or at all. The same is true of your suppliers, which could lead to supplies being disrupted.
So consider whether your business and its cash flow is adequately protected from these risks. Do you have enough of a financial buffer to absorb any unexpected shocks? Are you over-reliant on a single supplier? Do you have a credit insurance facility in place to safeguard cash flow from customer insolvency or non-payment of invoices?
Again, take the time to assess your business’s finances and cash flow forecasts to establish whether extra protection is required.
The economic environment is fluctuating wildly
As we’ve already alluded to, economic and trading conditions today are vastly different compared to only a few months ago.
As a result, any external funding facilities your business is using may no longer be best suited to your requirements. They could even be counter-productive.
Many businesses, for instance, secured new lines of credit in order to cope with the challenges presented by the pandemic and the aftermath. Yet today’s issues are very different.
So the recent rise in interest rates and shifting economic environment should be a cue to review whether any facilities you have in place continue to support your business day to day, and explore whether other funding products would be more suited and provide better value overall.
Remember, it’s not just the cost of a facility that’s important; it’s the overall value and what the facility enables your business to achieve or overcome.
Keep an eye on foreign currency
As we have seen, government policy and interest rates can have a direct impact on the value of the pound.
If your business regularly purchases goods from abroad or sells to overseas customers, you’ll have already noticed the impact on margins of the recent fall in the value of Sterling.
So, first and foremost, consider how that impacts your business’s cash flow. If margins are lower or falling, will that create cash flow issues down the line? Do you need to take action to improve or protect it as a result?
Secondly, it could be worth exploring the various commercial currency exchange services which are available to businesses. Spot conversions, forward contracts and batch payments all bring their own advantages when making international payments, and could enable your business to secure more favourable rates, increase profit margins, lock in fixed rates for future transactions and achieve more predictable cash flow.
To explore whether you could switch to a more suitable funding facility or secure a new facility to assist with today’s challenges, we can help. An independent commercial finance broker with over 25 years’ experience, we have expert knowledge of and access to a wide range of funding solutions. Call our team on 0800 9774833 or request a call back here to discuss your options.