How the Rising Bank of England Base Rate Affects Your Business

Rising costs in the UK have become the norm recently, so it's no surprise to see the Bank of England Base Rate increasing, but what exactly does an inflated Base Rate mean to your business? In this article, we explain what the Bank of England Base Rate is, why it's going up and how it could affect your business.

How Much Has the Bank of England Base Rate Increased By?

As you can see from the graph above (source: Bank of England website), the Bank of England Bank Rate (another term for the Base Rate) has been on a notable climb since the end of 2021. In December 2021, the base rate rose from 0.1 to 0.25 and is currently at 4.5 (correct as of 13th June 2023). However, this is unlikely to be the highest the Bank Rate will reach before it goes down again. In July 2007, the Base Rate reached 5.7, and while talking to Jeremy Hunt, BBC News stated that the "UK has "no alternative" but to hike interest rates in a bid to tackle rising prices". The Base Rate will likely only continue to climb over the coming weeks.

What is the Bank of England Base Rate?

The Bank of England (BoE) Base Rate is the interest rate set by the BoE by which commercial banks can charge for lending. Subsequently, when the Base Rate rises, it becomes more expensive for businesses to borrow money. This increase in borrowing costs can result in the following:

1. Increased Borrowing Costs

When the Base Rate rises, if you have a variable-rate lending product, such as a loan or a credit card, you can expect your monthly payments to increase as your interest rates are likely to increase. This can put a strain on your cash flow and make it more challenging to invest in growth or meet your financial obligations.

If you are experiencing cash flow challenges, a Business Loan or Invoice Financing Solution may provide a temporary solution, giving you some breathing room to get back on track.

2. Reduced Re-Investment

Understandably, rising borrowing costs might discourage your business from investing in new projects or equipment. A knock-on effect of this is slower economic growth or job losses in more dire circumstances.

Reinvesting in your business is an integral part of a successful growth strategy, whether investing in new hires, better equipment, new premises or something else. We recently surveyed over 500 business leaders and senior decision-makers across the UK to determine how they reinvest. If you're concerned about how your business is reinvesting compared to others in the UK, we recommend reading about our survey.

3. Higher Prices/Inflation

When your operating costs increase, whether that's down to the cost of Business Energy, inventory or business rates, you have two choices. You can either find a way to manage those costs or pass those costs on to your customers by raising your prices. For many businesses, the latter is often the preferred option, but it does lead to inflation, creating a challenging environment for consumers.

4. Lower Demand

Understandably, if consumers aren't willing or able to pay higher prices, they're more likely to cut back on spending, leading to lower demand and a decrease in purchases.

How an Increased Base Rate Could Affect Your Business

How rising Base Rates affect your business depends on your business's size and unique circumstances. Larger businesses with access to cheaper funding sources may be less affected than smaller businesses that are more reliant on Business Loans and other sources of finance. Businesses in sectors sensitive to interest rate changes, such as construction and manufacturing, are more likely to be affected.

Why is the BoE increasing the Base Rate?

As they have done so in the past, the BoE has raised the base rate to bring down inflation. Although rising base rates can have negative consequences, they can help return the UK to a more prosperous position. It's beneficial to consider the potential impact of rising Base Rates on your business and plan to mitigate any risks.

How to Prepare for Rising Bank of England Base Rates

There are many things you can do to prepare your business for the rising Base Rate:

Review Your Business's Financial Situation

Ensure you have full awareness of your business's current financial situation and identify areas where you can cut costs. This could include reducing unnecessary expenses, negotiating better deals with suppliers, or increasing prices.

Refinance

If you have variable-rate loans, consider refinancing them to fixed-rate loans. This will lock in your interest rate and protect you from future rate hikes.

Grow Your Cash Reserves

A healthy cash reserve provides your business a buffer to protect against unexpected outgoings. Instead of spending or reinvesting into your business, you could set aside a monthly amount. Alternatively, consider taking advantage of any government schemes that offer financial assistance.

Reduce Your Energy Costs

Rising energy costs can put a strain on your business's bottom line. Investing in energy efficiency measures, such as insulation and energy-efficient lighting, can help to reduce your energy costs and make your business more sustainable. You could also investigate ways to reduce your energy consumption through simple energy use reduction measures, such as those we covered in our Top 10 Business Energy Saving Tips.

Alternatively, we can compare the Business Energy tariffs in your area and let you know if we can reduce your energy bills.

Will an Increased Base Rate Affect Your Business?

The rising Bank of England Base Rate presents a challenge for all UK businesses, but it's a challenge your business can overcome if you prepare. By preparing for rising rates, you can mitigate the potential risks your business could face, protect your bottom line, and continue to be prosperous.

How We Can Help Your Business

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Jon Cole-Dalton