More than two-thirds of UK SMEs are concerned about interest rates rising, according to the Lloyds Bank Business in Britain report, while the stuttering global economic recovery has caused business confidence to dip to just 43%. Amid this doom and gloom, however, many are using the wobble as an opportunity to shore up their businesses and plans for the long-term, and they may well be supported by useful legislative developments.
The risk of rises
Bank of England governor Mark Carney has previously suggested that 2.5% will be the 'new normal' for interest rates by 2017. Though that may not seem much of a jump, it's a big change from the current lows of 0.5% and there are three key areas in which SMEs could feel the hit:
1. Debt. Increasing interest rates means higher loan repayments. Worse still, if banks offer better rates to savers then peer-to-peer lenders will also dry up – a problem that would disproportionately affect SMEs.
2. Consumer spending. Mortgages and personal loans will also rise with interest rates, potential hitting consumers in their wallets too.
3. Rising costs. As other businesses respond to rising rates, the cost of goods and services will increase. The risk of rising commodity prices, particularly oil, could worsen matters further.
Mitigating the impact
In the short to medium-term, it's vital to ensure that your business cash flow is as efficient as it can be. We recommend starting by ensuring invoicing policies give clients no excuses for late payment:
- Agree clear terms, including late payment charges to discourage poor practice.
- Ensure your accounts department has a clear process and timeline for sending prompt, accurate invoices.
- Set a timetable for invoice follow-ups.
- Contact an enforcement agent like Dukes Bailiffs to engage with non-payers.
To deal with fluctuations in commodity prices and consumer demand, look for ways to lock in long-term agreements to ensure you have a stable cash flow during any spells of uncertainty.
For immediate plans for growth, you may want to look for alternatives to loans to minimise your exposure to interest rates. For example, using equipment leases or hire purchase agreements, and launching products through crowd funding platforms like Kickstarter.
However, if your business needs extra capital, either to meet costs or to expand, equity investments are an excellent alternative. Sharing control or profits may seem unattractive but, for the many business who have yet to experience rate increases, having advice from experienced angel investors or venture capital companies could make all the difference.
It's also an excellent time to explore new advances in payment and client engagement technology. Making it easier for clients to pay is always an advantage when it comes to securing cash flow.
If you still find yourself in need of finance to meet seasonal or unpredicted cash flow problems, remember there are always alternatives. For example:
- Debt factoring (selling your invoices to a third party).
- Borrowing from pensions funds, if you run a Small Self-Administered Scheme (SSAS).
- Applying for grants and awards available through the government and other business associations.