Now, it’s less a question of ‘if’ than ‘when’. Business owners and householders all over the UK are waiting to hear the news that interest rates are set to increase. And SMEs are likely to find that commercial mortgages, other forms of debt, and day-to-day costs are affected by the expected hike. On the upside, businesses’ savings would be, too.
Earlier this month, the Bank of England held steady, voting to keep interest rates at 0.5 per cent for another month, the historically low level that they’ve held since 2009. But indicators suggest that rates will start to inch up towards the end of the year or by January at the latest – most likely by an initial quarter percentage point. The Bank’s Governor, Mark Carney, has hinted as much, adding in a recent interview that individuals and businesses will need to get used to a ‘new normal’ of 2.5 per cent by early 2017. Others within the Monetary Policy Committee, which sets rates, have suggested three per cent would be a more likely figure by that point.
So, what does this mean for Britain’s SMEs? Worryingly, it seems that many firms are unprepared for any rise whatsoever, however inevitable it may be. More than one in five small companies believe that they’ll be in serious financial trouble if interest rates are lifted by one per cent by the end of 2015, according to research from R3, the insolvency practitioners’ body. It seems that some businesses have become complacent during a sustained period of stable, remarkably low interest rates, while others may have been kept going by the combination of lower interest rates and a relatively flexible attitude on the part of creditors. About 65 per cent of SMEs have no measures in place at all to deal with rising rates, a report by the Institute of Chartered Accountants for England and Wales (ICAEW) found. And more than half of those that felt a rate rise would hit their turnover still had no plans to counter this outcome.
However, 70 per cent of the business owners questioned by R3 felt that a rate hike wouldn’t affect their operation at all. This may be a reflection of greater confidence in the business community after several years of downturn-related gloom. But experts fear this good mood bubble could easily be popped by an interest rate rise, and the ongoing uncertainty over when an increase will take effect is making many firms reluctant to execute plans for expansion. The Federation of Small Businesses and the British Chambers of Commerce have warned that the current recovery is still fragile, and renewed growth could collapse if rates are increased too quickly. The Business Secretary, Vince Cable, is another leading figure who has forecast that a premature rise in rates could damage smaller firms in particular.
The ICAEW has made some recommendations about ways in which small firms should determine their readiness for a rise in the base rate – whenever it may happen.
Check your charges.
If your business has any borrowing arrangements, look at the fees and charges incurred, whether you have a fixed or variable rate on loans, and then calculate what the potential impact of interest rate rises may be on your costs. The important thing is not to put your head in the sand. This could be a good time to ask yourself whether your current types of debt still meet the requirements of the business. Would it be preferable to secure a different kind of lending now, or if your company’s circumstances change?
Talk to your accountant.
Most small firms rely on their accountants both to crunch numbers and as business advisors, and their help could be invaluable with your financial planning at this time. Working together, assess your enterprise’s debt levels, the health of the firm’s cashflow now as well as in the medium and long-term, and review where any spare money is deposited in light of possible moves in interest rates. Some accountants are also advising SME clients to bring forward any debt-backed asset purchases to avoid the extra costs that would be incurred by a rate increase.
Review client relationships.
Some businesses may be tempted to stock pile inventory to take advantage of lower interest rates in the short-term, but weigh this against the cost and convenience of storing any extra products bought. Talk to suppliers about this, as they may still be prepared to offer a discount to buy now but make delivery of goods later. Look at all of your financing arrangements and consider how they might be affected by higher interest rates, and whether now is the time to renegotiate with clients over pricing levels.
Late payment is a problem for firms wherever they are in the economic cycle. Recent research from payment group Bacs suggests that UK small companies are owed more than £46 billion in unpaid bills. SMEs might think now about charging interest to persistent late payers to dissuade them from the tardy processing of invoices. As well as deterring late payers, this will also serve to counter some businesses’ own growing interest costs.
In the past, banks were keen to sell small businesses swaps and hedging products to protect against interest rate rises. But many of these arrangements are now mired in controversy and litigation, since the Financial Conduct Authority has fined many of the major banks for mis-selling SMEs overly complex, expensive and, ultimately, useless insurance policies of this kind. One of the best measures that a small firm can take in the present circumstances is to engage in some good and thorough housekeeping with the aid of qualified advisors. Be realistic and honest about how vulnerable your business is to changes in monetary policy, and act accordingly. The general consensus is that interest rates will not remain at their record low for much longer. So, you’d be wise to make your motto: ‘Be prepared’.
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