Amid rising living costs and inflation at a 40-year high, the Bank of England has raised interest rates opens in new window to reduce inflation and return it to a stable level, which is crucial for a healthy economy.
Since December 2021, the Bank of England’s Monetary Policy Committee opens in new window has increased interest rates nine times, with the hike in December 2022 taking the base rate to 3.5%, the highest in 14 years.
Such economic conditions mean several challenges for existing small business owners and those looking to start a new venture.
The cost of materials is high, access to finance is more challenging, and consumer spending opens in new window is decreasing in many sectors.
But despite all this, there are steps founders can take to help protect their companies and bounce back when the economy recovers.
Data from previous economic downturns opens in new window shows small businesses often lead to post-crisis growth.
Read our guide on 10 reasons to launch a business in a recession opens in new window.
How increased interest rates impact start-ups
Rising interest rates can impact small businesses and start-ups in several ways:
1. More expensive finance
If your business owns property, you may also face an increase in your mortgage payments.
The increased costs can mean it takes businesses longer to pay loans off, which can affect financial objectives and force founders to delay growth plans.
2. Restricted access to funding
With more expensive funding due to higher interest rates, businesses can find it harder to obtain finance opens in new window.
Lenders may be less willing to lend to new start-ups, and it can be more challenging to access short-term funding to deal with increased expenses or business expansion.
3. Reduced consumer spending
Increased interest rates see mortgage payments and other costs increase, which leaves consumers with less disposable income to spend on products and services.
Businesses offering luxury or non-essential products can be particularly hard hit at these times.
4. Higher supply chain costs
During times of high-interest rates, the costs of goods rise, so suppliers often follow suit by increasing their prices and changing their payment terms.
This can impact a business’s cash flow opens in new window.
5. More late payment
B2B companies can be hit by increased late payment of invoices when interest rates are high.
Clients may face financial difficulties, meaning they are slower to pay their bills.
As well as the adverse effects on cash flow, business owners may have to spend more time chasing invoices opens in new window.
How to protect your start-up from rising interest rates
Taking steps to plan for rising interest rates and protecting your business from the negative impact is crucial.
There are several options you can adopt to help protect your business:
1. Review your business plan
It’s a good idea to revisit your business plan opens in new window to check that your objectives are still relevant in current conditions.
It’s crucial that you know how the challenges caused by the economic downturn will impact your start-up.
You need to understand all your business’s costs opens in new window, including loans with variable interest rates that could lead to higher repayments.
It’s a good idea to try and predict how increased interest rates and falling customer spending might affect your plans and cash flow.
This action will help you determine your business’s sales, costs, and profits opens in new window, making it easier to set budgets.
For more advice, read our guide to business forecasting during periods of high inflation opens in new window.
2. Reduce your costs
To maintain your cash flow, you could look for ways to reduce your spending.
If you’re facing increased supplier costs, try negotiating a better deal or finding a cheaper supplier.
Other ways you can cut costs include:
- shop around for a cheaper credit card
- move to a more affordable office or switch to working from home
- review subscriptions to check whether they are essential or can be cancelled
- cut back on travel costs by organising more meetings online instead of in-person or using cheaper transport options and hotels; booking travel earlier often means lower prices
- reduce energy costs by taking actions such as sealing windows and doors to prevent heat loss, switching to energy-saving lightbulbs opens in new window, and installing automatic lighting
- outsource processes such as accounting, human resources, and marketing instead of running them in-house.
Read more on reducing costs and increasing profits opens in new window and get some helpful tips for outsourcing expertise opens in new window.
3. Adjust your prices
A period of rising interest rates is the time to review your pricing strategy.
With consumers also facing financial difficulties during an economic downturn, raising prices might seem counterintuitive.
However, it may be necessary to cover your costs and maintain your profits.
If you’re offering a premium product or service, it may even be beneficial for reaching customers who still have the budget and desire for luxury brands.
You can do other things, such as bundle pricing, which involves grouping individual products into a single-priced bundle that you sell with a discount.
Read more about the pros and cons of raising your prices opens in new window.
4. Fixed-rate, flexible and alternative funding
There’s no escaping that rising interest rates may make it harder for start-up businesses to access funding.
However, if you decide to apply for finance, business loans with fixed interest rates might be a good option to help you through challenging times.
A locked-in rate over several years means you have the certainty of being able to budget for the repayments and not be hit by increases should interest rates rise further.
You might also obtain funding from alternative lenders with less strict eligibility requirements than traditional banks.
At the same time, some finance providers offer flexible lines of credit that you can use to settle an invoice or other bills, which you then repay over several months.
Find out more about Start Up Loans and whether you could be eligible for a loan opens in new window.
Want to learn how to manage your start-up’s finances? Check out our free online courses in partnership with the Open University on being an entrepreneur.
Our free Learn with Start Up Loans courses opens in new window include:
- Introduction to bookkeeping and accounting opens in new window
- Financial accounting and reporting opens in new window
- Financial methods in environmental decisions opens in new window
Plus free courses on finance and accounting, project management, and leadership.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.