Many businesses appear to be failing to prepare themselves for an impending increase in interest rates and those dependent on consumer spending in particular need to think about the implications. Are Businesses Ready To Deal With A Rise In Interest Rates? is a survey of 500 SMEs carried out by the Institute of Chartered Accountants in England and Wales (ICAEW). It found that of those businesses expecting a rise in the cost of borrowing to affect them adversely, 54% are not carrying out any contingency planning.
As the study points out, 1.6 million businesses registered with Companies House since 2009, which means they were established while interest rates were held at a historic low of 0.5%. A sudden increase in rates may hit these businesses disproportionately hard, since they are unused to operating in a higher interest rate environment.
While rises now look more certain, they are likely to be gradual, says Clive Lewis, Head of Enterprise at the ICAEW. “The consensus seems to be that the rise when it comes will be very incremental,” he says. “Perhaps only reaching 1% by the end of 2015 and gradually rising to around 2.5% by 2017. So there is time for businesses to take steps to prepare.”
Higher borrowing costs
How businesses react to the possibility of higher borrowing costs will depend on their current levels of debt. Those companies paying for property or other assets on fluctuating interest rates need to look at fixing those rates, suggests Bobby Lane, Partner at accountants Shelley Stock Hutter. “That will provide some certainty on costs within your business plan for the coming three to five years,” he says. Businesses with expansion plans might want to consider bringing those plans forward and securing borrowing at lower rates.
“We are seeing some sectors, such as construction, already experiencing difficulty recruiting staff and the inevitable consequence will be a bidding up of starting salaries. As more sectors get to that position, that will start to be an issue” Clive Lewis, Head of Enterprise at the ICAEW
Businesses might also want to look at whether they have the right mix of financing going forward. Invoice finance and factoring can bring working capital into the business, invaluable for companies expecting increased demand. “Yes, these forms of finance will also be affected by interest rate rises and the associated costs may rise, but they can be the best form of finance for growing businesses,” says Bobby.
With an economic recovery starting to look more established, it seems likely that employees will want to share in any bounty. A separate study, the ICAEW/Grant Thornton Business Confidence Monitor, shows businesses expect employment to grow by 2.2% over the 12 months from mid-2014 onwards. This would mean around 450,000 new private sector jobs.
“We are seeing some sectors, such as construction, already experiencing difficulty recruiting staff and the inevitable consequence will be a bidding up of starting salaries. As more sectors get to that position, that will start to be an issue,” says the ICAEW’s Clive Lewis. This will, he says, lead to some hard choices on both the issue of rewarding loyal staff and seeking to increase headcount.
The possibility that higher interest rates will bring about a stronger pound may give exporters cause for thought, since exports from the UK under these conditions start to look less competitive compared to other producers. Clive believes this is a concern. He suggests that companies that have weathered the recent economic storms would do well to remember the good housekeeping and cost-consciousness that has got them this far. “It will be important for companies to do the maths, look at gross margins and operating costs to see if they can make savings in other areas,” he says.
"How businesses react to the possibility of higher borrowing costs will depend on their current levels of debt. Those companies paying for property or other assets on fluctuating interest rates need to look at fixing those rates" Bobby Lane, Partner at accountants Shelley Stock Hutter
That said, there are ways of taking advantage of a stronger pound, as Bobby Lane points out. It can bring benefits if your manufacturing base is outside the UK. “Businesses should talk to their banks and other advisers,” he says. “Currency risk is an area they need to be aware of and there are simple ways to deal with this such as using a forward contract.”
Of particular concern is the impact of higher rates on consumer confidence and spending. UK household debt stands at a record £1.4 trillion, according to the Bank of England with £1.2 trillion of that accounted for by mortgages.
However, the outlook is far from clear as Clive Lewis points out. “If wage increases rise to at least the level of inflation and if house prices are stabilised by higher rates, then people may feel they can carry on spending.” Businesses dependent on consumer spending would do well to keep the cost-cutting ethic to hand. “You have to do all you can to keep top-line growth going, while keeping costs under control.”
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