How Can Businesses Deal with Rising Interest Rates?

Posted on 24th July 2023

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The rise in interest rates has continued to make headline news over the last year. No area of finance has been left untouched by these incremental increases – from mortgages, credit cards and loans to savings.

Last month, the Bank of England raised interest rates for the 13th consecutive time, to five percent. And the rises show no signs of abating any time soon.

While the impact of increased interest rates on consumers has been well documented, what is their impact on businesses? And, more importantly, what can they do to protect themselves against these rises?

What are interest rates?

In a nutshell, interest rates determine the cost of borrowing money and the return on the capital loaned. They are shaped by a range of factors, namely inflation, central bank policies and general economic conditions.

In that loans and credit facilities are vital to providing a company with the funds needed to manage their costs, run their operations and grow the business, interest rates are a key component in determining the amount they can borrow and what effect that will have on them financially. This includes their profitability and cashflow, as well as their overall financial viability.

Key challenges

Cashflow is key for businesses. And it will be potentially reduced along with their profit margins if their repayment obligations are higher, making it harder for them to meet their costs, including operating expenses, paying suppliers or even just maintaining enough working capital to get by.

The fallout from this may be damaged supplier relationships, missed payment deadlines or supply chain distribution. It also means that they can’t readily put funds to use in other parts of the business, like marketing, R&D and talent acquisition.

The cost of borrowing generally will also put a greater strain on firms’ finances. This is particularly true if they borrow heavily to finance expansion, to pay expenses or just to remain operational.

Growth plans may also be halted by rising interest rates, as the return on investment diminishes with the increasing cost of borrowing. This can impact not only companies’ own growth, but that of the wider economy, jobs and investment.

Tackling the problem

The first step to dealing with the issue is to map out a plan. That starts with a comprehensive assessment of the business’ finances and what impact rising interest rates may have, particularly in terms of debt obligations, cashflow and other financial commitments, identifying the areas that must be addressed as a matter of priority.

An effective cashflow management strategy is paramount. By implementing measures such as tighter credit control, negotiating more favourable payment terms with suppliers and speeding up the collection of receivables, firms can get the most from their cashflow.

Companies can also access alternative finance, such as peer-to-peer lending, crowdfunding and venture capital as opposed to taking in traditional bank loans, which are often expensive due to the rising rates. A further option is to leverage their assets to obtain short-term financing.

Another potential move is to hedge against interest rates by taking up interest rate swaps or options. These enable businesses to fix their interest rates over a set period to guard against future hikes. But it’s advisable to engage a financial expert to find the most appropriate one for them, depending on their situation.

Open Accounting and AI’s role

Open Accounting and Artificial Intelligence (AI) can help with cashflow management. Drawing on data from bank feeds, accounting software and other relevant sources, paired with AI, Open Accounting can provide valuable real-time insight that enables more accurate cashflow forecasting and, thus better decision-making.

Effective budgeting, rigorous cost control and a relentless pursuit of operational productivity can empower firms to weather the storm of rising interest rates. By streamlining their processes, embracing technology and adopting a culture of continuous improvement, they can achieve far greater efficiency and profitability moving forward.

To stay ahead of the curve they need to remain informed and agile. That means keeping a close eye on key economic trends, remaining open to new ideas and taking timely and relevant advice from experienced professionals. That will enable them to make informed decisions and successfully navigate the ever-changing business landscape.

Businesses can keep on prospering, even in the current high interest rate environment. By meeting the challenge of rising interest rates head on, they can continue to invest in growth opportunities, meet their financial obligations and, most importantly, maintain cashflow,

Chirag Shah, founder and CEO of Nucleus Commerical Finance and Pulse.io has over 20 years of experience in the financial services industry and a deep understanding of the needs of UK SMEs.

In 2011, he founded Nucleus, a leading alternative finance provider, to offer flexible and tailored solutions for SMEs across various sectors and stages of growth. With an understanding of the challenges that UK SMEs face in the current economic climate, Chirag launched Pulse in October 2022, a free-to-use service that helps businesses and accountants gain insights into financial performance with AI-powered data visualisation and personalised dashboards. Chirag is not only committed to driving growth and innovation in the UK business ecosystem, but he’s also helping SMEs better understand their data to boost their profitability and guide them towards success.