With the Bank of England set to meet this month on the 20th June. Company owners and key personnel should be watching for any discussions on the current state of the economy and potential changes to interest rates in the UK.

The base rate of interest is set by the Bank of England to encourage or discourage spending within the UK economy. It can be a tool used to control inflation levels within the UK economy which is currently sitting at 2.3%. This is currently 0.3% over the Bank of England’s target rate of 2%.

Now let’s look at what it means to you if the base rate was to be changed by the Bank of England.

Impact of an increase in the interest rate for companies.

While an interest rate fluctuation, leading to an increase in the base rate would result in consumers receiving more back from their savings accounts and current accounts for holding money within these accounts. It would result in an increase in the cost of borrowing which could see your business loan repayments and credit card bills increasing.

The Bank of England increase the base rate to discourage spending within the UK economy and encourage you to save funds within your business bank account through an incentive to receive higher interest payments.

Impact of a decrease in the interest rates for companies.

As you can expect, interest rate fluctuation resulting in a decrease in the interest base rate will have the opposite effects. As consumers are less likely to save their money due to the low levels of return from saving interest and may consider borrowing money if there is a favourable rate. Such as the interest rate being below the rate of inflation.

Although there are also drawbacks to the Bank of England decreasing the base rate, as it stimulates the economy and can cause UK inflation to increase which will result in rising prices within the UK market and put pressure on demand for wages to increase.

How Interest Rates Changes Affect Business Owners

As a business owner, you may now be asking yourself should you be concerned about the Bank of England increasing or decreasing the base rate of interest and the impact that will have on business interest rates.

In short, it is very dependant on your business plan and strategy including your level of exposure to borrowing.

If you are a business owner who utilises borrowing and business loans to operate then you should be concerned if there is a change in the interest base rate. As an increase in the rate could result in the business turning over an unexpected loss due to the exposure faced by the business. However, if there is a fall in the base rate you could see the business cash flow position improve.

What if my business has no loans or borrowing?

You may feel as if a change in the base rate will not impact your business if you have no loans within the business.

However, without realising there will be an indirect impact on your business which can be used to your advantage to assist with your business strategy.

For example, if the base rate was to decrease then you can expect spending within the economy to increase which in future may result in higher supplier costs. Therefore, you may decide to buy extra inventory when interest rates drop in anticipation that your supplier costs will increase.

However, you should consider how much your business can afford to be held up in inventory. Given this you may want to look at having monthly management accounts completed to enable you to evaluate your exposure to changes in the interest rates and the disposable funds of your business.

Should I be worried about the impact of interest rates?

As we can see from the above changes in the base rate of interest can have an impact on your business without you even realising. To stay profitable and to manage your exposure to changes in the base rate of interest you should seek professional advice and look at methods to plan.

If you are worried about the how interest rates are going to impact your business, please contact us to assess your exposure to changes in the base rate and how to reduce your business risk.

Author: Dylan McComb