On Thursday 22nd June 2023, it was announced by the Bank of England that interest rates within the United Kingdom would be rising for the 13th time in a row to 5%. This is a 0.5% increase from the 4.5% that it previously stood at.
Why do interest rates keep rising?
Earlier this week, it was announced that inflation remained at a worrying high rate of 8.7% in May. This is much higher than economists forecasted at the start of 2023.
As a result, raising interest rates is the best way of getting inflation back down to the 2% ideal target. If inflation continues to not improve, it is anticipated that there may be further rises to the interest rates before they start to fall.
How will this impact my business?
There are various effects that the announcement will have on businesses, including: borrowing costs, consumer spending and over economic stability.
Increased borrowing costs
One of the most immediate impacts will be the cost of borrowing. This can affect both existing loans and new credit applications. Particularly for businesses looking to grow and scale, credit is relied upon for buying additional stock or expanding the business into new marketplaces. As interest rates rise, monthly repayments become more expensive and, as a result, put a strain on a business’s cash flow.
Consumer spending
Just as costs are rising for businesses, costs are also rising for the average consumer. Many will be finding their monthly mortgage and credit card repayments are increasing. This is reducing many people’s disposable income and access to credit.
This in turn will be leading to a reduction in spending on non-essential or luxury goods. As a result, businesses may start to see a fall in sales and should start to think about how they would adjust their marketing strategies and pricing models accordingly to be proactive for this potential risk.
Economic stability
There are many aspects to the economy that can have a knock on affect from the rise in interest rates. One that particularly would affect e-commerce sellers is the impact it may have on exchange rates. A higher interest rate may make UK exports relatively more expensive for foreign buyers, potentially damaging the demand for exports and impacting those that rely heavily on international sales. That being said, those that import into the UK from abroad may find this becomes more affordable.
How can my business remain safeguarded?
Whilst higher borrowing costs may strain cash flow and limit investment opportunities, others may view it as a sign of a strengthening economy and use this opportunity as a start for building a long term vision for their company.
The best way for businesses to survive this uncertain economic environment is to plan the needs for business, the minimum margins they would need to break even and a strong plan to continue to grow profit levels.
By analysing a business’ cash flow, it can break down the operational, investment and financing flows and establish where they can utilise funds to continue to grow and scale.
How AVASK can help
AVASK can help you by showing your historical cash flows, as well as work with you to forecast future cash flows and consult on how you can battle the economic uncertainties and expand your business even further.
Please get in contact today if you would like to know more about our cash flow services.
Christine Lawless
Exit Strategy Consultant
Christine.lawless@avaskgroup.com
