Minimising the impact of increasing interest rates

Since December 2021, the Bank of England’s interest base rate has increased eight times from a starting point of 0.1% to the current rate of 3.5% and it is anticipated that rates may continue an upward trend into the early part of next year.

It should also be remembered that business borrowings are rarely made at the base rate as the bank is seeking to make a return on the funds in lends, so the rates that businesses are paying are likely to be higher than the Bank of England base rate.

As the majority of business borrowing is on a variable rate basis increasing interest rate increases have an impact on the cost of borrowing, putting additional cashflow pressure on businesses that have significant borrowing, which is often the case for hospitality businesses where the cost of buying and refurbishing assets is high.

What advice would we give business owners?

We would therefore advise business owners to:

  • Ensure that they have a proper understanding of their borrowing costs and how these will vary as base rates increase
  • Update / prepare realistic cashflow forecasts considering their increased borrowing costs
  • Consider opening a discussion with the lenders to see what options may be open to help control borrowing costs or reduce pressure on cashflow, which may include:
    • Fixing
    • Extending the term of borrowings
    • Rationalisation of borrowings
    • Capital repayment holidays

It is important to remember that it is always easier to have conversations with lenders before facilities come under pressure so planning and opening discussions early are important along with seeking advice from advisors who can assist with forecasting and negotiations.