How will the interest rate increase affect my business?

Today the Bank of England confirmed an increase in the national interest rate from 0.5% to 0.75%.  Major political and economic changes are generally open to interpretation when it comes to their direct impact on businesses due to the variance in circumstances.

Hopefully, this isn’t stating the obvious.  Indeed, research from Money SuperMarket would indicate otherwise, after it found that 50% of Britons didn’t know what an interest rate was.

For the reasons above, it makes sense to take a holistic view of your business to assess its impact.

THREE THINGS TO CONSIDER

Consider these three areas as a starting point:

Will your customers still spend?

The public’s Marginal Propensity to Consume (MPC) is theoretically lowered by an increased interest rate.  If you are a B2C company your customers are more likely to be saving their money than spending it.

But that’s not exclusive to B2C.  Businesses with lower liquidity will be less likely to spend their hard-earned cash – as you may well find yourself.

A higher interest rate historically increases Marginal Propensity to Save (MPS), meaning the amount per £1 that a business or consumer will set aside for savings and not spend.  Luxury and premium products tend to take a bit of a hit when an interest rate rises.

What debt do you have?

If your business has any outstanding loans, they will cost you more to repay if they’re on a variable rate.  This could be in increased repayments or an increased term.  Make sure you read your terms and conditions on any outstanding debt.

What should you do with your business’ cash?

Usually a growing business with some spare cash can speculate on growing the business, and hence profits, by investing in more premises, new equipment or something to expand their offer.  Much like the above mentioned MPC/MPS balance, businesses will likely employ more caution when assessing their appetite to grow.  It might be better to save that spare cash and take advantage of the increased interest rate.

The rise in the interest rate now means we’re at the highest level since March 2009 .  The amount you could benefit is likely based on the amount of cash you have to save.  0.75% of £50,000 would not be as beneficial to you as 0.75% of £5,000,000.

As always when pre-empting and forecasting, GAS advises you to concentrate on the costs you can control within your business, rather than being bogged down in extraneous events.  Give us a call for an overview of your own costs and where you could save your business money.