In one of the most closely anticipated decisions since the financial crash, the Bank of England has announced an interest rate rise from 0.25% to 0.5%
It’s the first time an interest rates hike has occurred in more than ten years.
The announcement will immediately raise the cost of borrowing but what about the wider implications of the interest rate rise for small businesses?
Banks and alternative lenders will charge more to borrow. An increase in the cost of borrowing means business profit margins will suffer therefore affecting investment and growth. For example, some business owners may decide to postpone new projects or expansions during periods of high interest rates.
Higher interest rates will put more of a strain on personal finances meaning that small businesses could bear the brunt when it comes to payments. It may also affect the willingness and ability of customers to spend money on your products or services.
It’s not all doom and gloom! There will be winners from this decision. If your business has cash to invest in interest-bearing accounts, then there is money to be made. Similarly, if your business is debt low and cash high you may find yourself in a strong position against rivals. It will be possible to buy companies much more cheaply, because of less debt-financed competition in the market.
The impact will be felt more harshly for buy-to-let investors than conventional home-buyers as these loans are almost completely interest-only so the increase in payments will be steeper. This may also affect commercial rentals and properties with landlords passing the price increases on to tenants.
Speaking about the interest rate rise, head of Businesscomparison.com Philip Brennan comments:
“Interest rates have changed to try and stop the steadily increasing inflation rates. On a positive note it could see a rise in the pound meaning those who purchase products from aboard will benefit from reduced prices and those travelling aboard will also benefit. The decision was justified because of record-low unemployment, resilient consumer confidence and rising global economic growth. However, I would say that general confidence in Brexit is shaky to say the least. Real earnings are heading south and lots of businesses are making noises about leaving the UK because of Brexit. Many will see this change with mixed emotions.”