Interest rates have have risen drastically recently, with the UK government attempting to restore their economy, and this has many people wondering how this will impact their small businesses. Even before the economy began to grow increasingly unstable, starting and maintaining a small business was no mean feat. However, with the rise in interest rates, it might just be starting to get harder. As of September 2022, the base rate of interest has increased to 2.25%, from 1.75% in the Bank of England. This hike in interest means that if you are looking to borrow money from a bank, it will be more difficult to do so and also more difficult to pay it back. Here are some things you should know about the rising interest rates and its impact on your small business:
What Is Interest Rate?
If you take a trip to the bank, you’ll notice that there are many types of interest rates. Each one is calculated differently, and it’s important to know the difference between them. If you are taking out a small business loan, the interest will be a percentage of the amount of money you have borrowed. This will be a certain percentage of the money borrowed per period, and so the amount of money owed will grow over time. When you borrow money, you agree to pay back the full amount plus interest.
Why Is The Interest Rate Rising?
The hike in the rate of interest recently is due to the government’s decision to raise it in order to combat the soar in inflation. According to Forbes, the rate of inflation for a healthy economy is 2% for the Bank of England, but is currently 10.1%. Therefore, raising interest rates is necessary as inflation – the cost of living- is another factor that significantly impacts people’s lives. To lower inflation, the government increases interest rates so that people will be less likely to borrow money from the banks, then less likely to spend as much money as they cannot borrow as much. As a result, the cost of goods and services – and inflation – should decrease.
Will The Interest Rates Stay Steady Or Rise?
In September 2022, the Bank of England raised its interest rate from 1.75% to 2.25%. This was the seventh time since December 2021 that the interest rate has been raised, and it is likely that it will be raised further in the near future. This is because inflation is likely to still continue to rise. On the 3rd of November, the decision of whether interest rates will rise, lower or remain the same will be declared.
Will The Higher Interest Rates Hurt Your Small Business?
Higher interest rates might not feel like a big deal now, but they can impact your small business in the future. The cost of borrowing money will go up. This means you will have to pay back more money on your loan and have less money to run your business. You might find that you can’t increase the amount you spend on hiring new staff or purchasing new equipment. However, taking out a loan may be something that you have to do for your business, in which case it’s important to consider where you’re getting the loan. If you’re having trouble even getting a loan, you could apply for one at Aurora Capital, as it’s easy to apply and won’t affect your credit score.
How to Manage the Rise in Interest Rates
There are a few things that you can do to manage the rise in interest rates. One of the most common things that small businesses use to stay afloat is business loans. While you should take out a loan if necessary for your business, try to maintain a healthy cash flow. The rise in interest will mean that you will have more money to pay off over time, so if you can pay off your loan as soon as it comes in, you won’t have to pay as much interest. Second, you can delay expensive purchases such as a new computer or software. Saving money at more unstable times like these is essential, as the rate of interest has risen and is making things more difficult for small businesses.
