Why rising interest rates may make it more difficult for business to secure funding

The alarm bells are ringing for small businesses as interest rates continue to climb. A significant number of SMEs, still recovering from the COVID pandemic, are already finding trading tough without the worry of increasing interest rates. The CEO of state backed British Business Bank has expressed her concerns over increasing interest rates, stating, “we’re heading into choppy waters. Often smaller businesses start to struggle to access finance.” Businesses and politicians have underestimated the threat of quickly rising interest rates. The issue for businesses is predicting how much further they will rise, and if they will come back down.

The depreciation of the pound in recent months will likely see the Bank of England increase interest rates further to help combat the fall in value. The increase will be the 7^th in a row and will take rates to the highest in the last 14 years. Recent developments lead economists to believe base rates next year could reach 6%, this is twice the forecasted amount just 2 weeks prior. So, how do these developments impact your business, and specifically gaining external finance or funding?

As interest rates increase, not only does the cost of the servicing the debt go up, so to does the perceived chance of default or non-payment, making banks less willing to lend. Given how reliant SMEs are on debt as an external source of finance, these two impacts make raising capital, and therefore investing in growth a challenge. Businesses may take the option of halting investment or think they have no choice but to opt for shorter term loans tied to cashflow, increasing risks.

However, if the correct steps are taken and a solid plan for the future is put in place, the road out will be much less rocky.

SMEs can revisit and amend their business plan accordingly:

• Identify how rising interest rates will impact current loans to ensure you do not get caught out with increased repayments.
• Figure how many credit/debit facilities will be impacted by increased interest rates
• Have a serious talk with your suppliers – Possibly negotiate new terms with supplier & partners or think about how and when you purchase supplies.
• Preserve cash flow and limit spending. – One of your most precious assets in these uncertain times is your cashflow. With debt servicing requirements pushing up overall costs, businesses will need to assess where and when they are spending.

There are signs of hope in these uncertain times. It may seem counterintuitive to take out a loan in the current economic climate, however there are some channels that your business may want to consider. Securing fixed rate, long-term loans is an avenue that may align with your business goals, particularly if you can secure rates now, before they climb higher. Bank loans are not the only way to secure funding. Businesses may be able to raise equity funding, as an alternative to debt. Other finance options may be worth exploring if it suits your business. These bank loan alternatives are more inclined to grant you a loan than the traditional high-street bank as well as offering a more flexible and tailored approach. As rates are beginning to rise, it is a crucial time to look at options now and secure a good deal.

About Where Now Consulting Ltd: Where Now Consulting is a management consulting company that focuses on helping its clients to grow and compete. The company offers a range of consulting services including assistance raising capital or access funding, business turnaround and performance improvement, formulating market entry strategies, mergers and acquisitions, and sales and distribution strategy and management.