Interest rates: dealing with ‘higher for longer’

When we hear about inflation and raised interest rates, most of the talk is about the effect on individual’s mortgages. However, higher interest rates affect businesses as well.  If you have a loan, pay rent or a mortgage on premises, or even have a business credit card with a balance on it, the cost of this may hurt your business in the current climate. 

Money costs

Gareth Buckley, who runs accountancy business The Insolvency Company, says that higher interest rates are leading to challenges for many businesses. “Repayments have become more expensive,” he warns. With the Bank of England now forecasting that rates will remain high for at least two years; businesses should take steps to ensure they are dealing with their debt as effectively as possible.

Existing debt

If you already have business debt, now is the time to take a long hard look at it, especially if you are struggling with repayments. Check which business debt needs to be prioritised in difficult times, to keep your credit rating and to avoid adverse personal financial problems. “You should pay yourself first. Think about this as putting your oxygen mask on a plane before helping another to put their oxygen mask on,” says accountant Polly Arrowsmith.

Some types of business loans come with a ‘personal guarantee’ clause, which means that your personal assets could be affected if you cannot pay. You should prioritise these first when making repayments. Some other loans are less of a worry. Arrowsmith says that while not paying back Covid loans such as the Bounce Back scheme loans will affect your business credit rating, it will not affect your personal one.

Finance going forward

In a period of higher for longer interest rates, decisions about applying for credit should not be taken lightly. Buckley, at the Insolvency Company, suggests structuring your credit to keep interest payments and charges as low as possible.“For an asset purchase requiring a lump sum, a loan may be necessary. But if you only need a credit facility as a backup, consider a rolling credit facility like an overdraft or credit card, with charges applicable only when used,” he suggests. “Always review fees and interest rates for the entire agreement’s lifetime (or expected lifetime), to give yourself as much information as possible to help you make the best decision.”

Before taking out credit, ask yourself whether there is support available for free. Business support programmes like the NatWest Accelerator, local council initiatives and grants can assist your business as well. This list of schemes on the Government website might help. Before taking out loans in this environment, it is vital to ensure you can pay them back. “Evaluate your business’s cash flow to determine if you can afford to repay the loans – best- and worst-case scenario planning helps here. If uncertain, it’s better not to take on additional credit,” says Buckley.

If it all goes wrong

Keeping lines of communication open with creditors will help you to deal with debt difficulties, while Arrowsmith suggests that if you are struggling with your mental health due to repayments on debt you should fill in a form called the DMHEF (debt and mental health evidence form). “The finance provider should then give you more leeway in any discussions,” she says.

Separating personal and business finances as much as possible will help to ensure the safety of your own money if the business cannot pay its debts.

Further reading: SMEs are banking on better banking services

Rosie Murray-West

Rosie Murray-West is a freelance journalist covering all aspects of personal finance, as well as business, property and economics. A former correspondent, columnist and deputy editor at The Telegraph, she now writes regularly for publications including the Times, Sunday Times, Observer, Metro, Mail on Sunday, and Moneywise magazine.