With the Bank of England (BoE) announcing a 14th consecutive increase to its base rate in August, it’s been almost impossible to ignore the effects this can have on your wealth. The BoE also confirmed that the base rate would remain at the August level after the latest review on 21 September.
The BoE uses the base rate to try and control the rate of inflation, with the goal of keeping it at a target of 2% a year.
However, inflation has exceeded the 2% target in every month since August 2021, as Office for National Statistics data shows. As a result, the BoE has increased the base rate throughout this period in an attempt to slow inflation.
As the base rate essentially determines interest rates across the economy, this works by increasing the interest rates on savings accounts. In turn, the hope is to encourage individuals and businesses to save their money, rather than spend it.
Additionally, the rates on borrowed money – such as loans or mortgages – also tend to increase. This puts strain on individuals’ and companies’ finances, discouraging them from spending.
With the base rate now at its highest level since 2008, and the potential for more increases to come this year, it’s important to be aware of what this might mean for your business.
So, if you’re a business owner, discover four ways these increases could affect your company.
1. Increased interest on your business savings
One of the most easily identifiable impacts of a rising base rate is an increase in the amount of interest you can earn on your savings.
For any savings you have in a business account, you might be in line to receive significantly more interest.
According to Moneyfacts, the highest rate available on a business easy access account as of 21 September was 3.35%. That compares to 9-11 May 2022, when the average rate was just 0.094%, United Trust Bank reported at the time.
This tends to be good news for your business, as it means you’re likely to receive more interest on your savings.
For example, at the May 2022 average of 0.094%, £50,000 savings would be worth £50,047 a year later.
Meanwhile, if you held that same £50,000 in the account currently paying the highest available rate of 3.35%, you would have £51,675 in 12 months.
So, you may now be able to find far more competitive rates for your business savings. It may be worth checking to see whether you can find a more lucrative rate for your holdings.
2. Higher costs of borrowing money
While savings rates might increase, the flip side of this is that you may see rates of borrowing increase, too.
You likely have some form of debt in your business. Whether that’s on loans you took out to start or expand the business, or on a commercial mortgage you have for your company premises, you may well be repaying some form of borrowing to at least one lender.
However, an increase in the base rate could mean you pay more in interest on this money. If you don’t have a fixed rate on either a mortgage or a business loan, the interest rate on this debt may have increased alongside the base rate.
If you’re in this position, you could consider seeking to change your borrowed sum to a fixed rate. While this may be higher than the rate you currently pay, at the very least you may have the peace of mind that your repayments will be the same and you won’t be affected by further base rate increases until the end of the term.
Bear in mind that there may be additional costs or charges to pay when changing to fixed-term borrowing, either for a mortgage or general loan.
Furthermore, just because the base rate has been rising, the BoE could choose to reduce it again if inflation falls. This might leave you stuck on a higher fixed rate that you can’t move from while rates are falling.
You’ll need to weigh up whether you feel the certainty of fixed payments is worth the potential risk of rates subsequently falling.
3. Limited consumer spending could affect your sales figures
Outside of your business’s individual finances, another area to keep an eye on when the base rate is increasing is your sales figures.
As one of the primary goals of increasing the base rate is to slow consumer spending, you might see the fallout from this on your bottom line as your customers or clients seek to tighten their belts.
Clearly, this is a potential problem for your company. Losing sales could result in falling revenue and profit, perhaps affecting your individual income or your ability to grow the business.
To combat this, it may be worth looking at methods that can encourage purchases. Whether you change your prices, offer discounts, spend more on marketing, or create a referral programme, it can be crucial to keep cash moving through your business.
4. Changes in agreements with suppliers
Many businesses rely on one another to successfully provide their product or service. So, one potential issue you might run into is that your suppliers are also facing some of the same issues and pressures as you.
They may too have increased borrowing costs or lower sales figures from customers who are seeking to save money. As a result, they may respond in various ways. For example, they might:
- Increase the cost of what they supply to you
- Change the product or service they provide to cut costs
- Cancel their relationship with you entirely.
In this case, you could look to renegotiate your agreements with suppliers. If this isn’t possible or they aren’t willing to do so, you could also scour the market and see whether there’s a better partner for you out there.
As so many business owners might find themselves in a similar situation, you may be able to forge new relationships that are mutually beneficial as interest rates rise.
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This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.