As a small business owner myself, I know how important it is to stay informed about financial changes that can impact your business. With the recent announcement of the Bank of England’s 10th successive interest rate increase, it’s worth exploring what this could mean for small businesses.

The Definition of Interest Rates

Simply put, interest rates are the amount a lender charges a borrower for using their money. When interest rates rise, it becomes more expensive to borrow money. This can have a direct impact on small business owners who rely on loans to run their operations.

Increased Cost of Borrowing

If you have a small business loan with a variable interest rate, an increase in interest rates will mean an increase in your monthly loan payments. This can be challenging for small businesses that operate on tight budgets. For example, let’s say your monthly loan repayment was £1,000 at a 3% interest rate. If the interest rate goes up to 4%, your monthly loan repayment will increase to £1,040. While this may not seem like a big difference, it can add up over time and directly affect your bottom line.

Difficulty Securing Loans

As borrowing becomes more expensive, lenders may become more selective about who they lend to; this could make it harder for small businesses to secure loans in the future. Lenders may also require higher credit scores and more collateral to secure the loans, which could limit the finance options available to small businesses.

Reduced Consumer Spending

Rising interest rates also influence consumer spending, which can hurt small businesses that rely on sales to keep their doors open. When interest rates go up, it becomes more expensive for consumers to borrow money, leading them to cut back on spending. This can result in a decrease in sales for small businesses, which can be a significant challenge for those that rely on a steady stream of revenue to keep their doors open.

How to Manage the Impact

  • Stay informed: Stay up-to-date on any changes to interest rates and the economy. Read news articles and economic reports and consider reaching out to a financial advisor for personalised advice. Being informed will help you make better decisions for your business and anticipate any potential challenges.
  • Lock in a fixed interest rate: Consider locking in a fixed interest rate for your small business loans. This can provide peace of mind, as you’ll know exactly what your monthly payments will be regardless of changes to interest rates. While fixed interest rates are typically higher than variable interest rates, they can offer stability and predictability in an uncertain economic environment.
  • Explore alternative sources of funding: Consider exploring alternative funding sources, such as crowdfunding or grants, that may not be as impacted by rising interest rates. These options can provide additional funding for your business and help you reduce your dependence on traditional loans.
  • Manage expenses: Cut down on unnecessary expenses and focus on improving your business’s efficiency; this can help you stretch your budget further and make you more resilient to any economic challenges that come your way.
  • Diversify your customer base: Consider expanding your customer base to include new types of customers or markets to reduce the negative effects of declining consumer spending. This can help you mitigate a potential slowdown in any one market and ensure a steady stream of revenue for your business.
  • Offer promotions and sales: Consider offering promotions or sales to incentivise customers to spend. This can help you attract new customers and retain existing ones during challenging economic times.
  • Invest in digital marketing: Increase your digital marketing efforts to reach new customers and maintain engagement with current customers. Digital marketing can help you target a wider audience, regardless of where they are located, and keep your business top of mind.

Yes, rising interest rates can be a daunting prospect for small business owners. However, with the right strategy and preparation, it is possible to manage the fallout and ensure the success and longevity of your business. Stay informed, consider alternative funding sources, manage expenses, diversify your customer base, offer promotions, and invest in digital marketing. By taking these steps, you can weather any economic challenges and continue to grow and thrive as a small business owner.

If you would like to find out more about managing the numbers in your business check out our previous blog posts – Closing the cashflow gap and Improving your cashflow or book a free coaching session and let’s have a chat. 

Martin Baillie is a Business Coach and Growth Specialist at ActionCOACH Bury St Edmunds, committed to working with business owners to create sustainable, viable, profitable entities within the local community, and creating 1000 new jobs in the East Anglian region through that growth. 

We find that most business owners are experts in their industry but not in business. Our ActionCOACH business re-education coaching programmes help business owners to understand all aspects of business so they can build a profitable, sustainable business that works without them.

Contact Martin Baillie, ActionCOACH Bury St Edmunds now on Tel: 01284 334099. You can also follow him on LinkedIn , Instagram and Facebook