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Predicting the effect of interest rate rises
Director Nicola Layland takes a look at previous predictions on the effect of interest rises over the last 7 years.
In 2017 our team produced an interesting article entitled ‘Would an increase in interest rates lead to a rise in business insolvency?' at that time interest rates were 0.5% and had been low for many years. Since the article, rates dropped to as low as 0.1%. Between December 2021 and August 2023 there were 14 consecutive increases in the base rate, rising to 5.25%. With the Bank of England concluding to hold rates for a sixth time it is a good time to look back and see how well we managed to predict the future.
Many are predicting a fall in interest rates at some point, most expecting it to have happened by now. If rates do start to fall, the last few years have shown that businesses need to be prepared in case that trend does not continue and we see rates rise again.
At the time the original article was written, research had shown that nearly 80,000 businesses would struggle to deal with an increase of 0.25% on the interest at the time rate. It was also thought that 79,000 businesses would not be able to repay their debts if the interest rate was to rise. Also, research conducted for the insolvency body R3 reported at the time that there had been a fourfold increase in the number of companies which were at risk of closure and/or insolvency.
So, did this become a reality? The answer is that it is difficult to know. When the article was written in 2017 no one had heard of Covid-19, the thought of being told not to leave your home for more than an hour a day for exercise was inconceivable and there were no wars breaking out across Europe. The reason this is mentioned is that the rise in interest rates has been one thing among many others to affect business owners and the economy.
Company insolvencies in 2023 reached their highest annual total in 30 years. The final three quarters of 2023 also saw the highest quarterly number of Creditors Voluntary Liquidations since this data started to be recorded in 1960. Clearly this was not all caused by interest rate rises, inflation has been at its highest rate that those under 50 have known and when I speak to business owners there is a general feeling that times are tough. However, it’s not all doom and gloom, those that are able to diversify and weather the storm are experiencing an uplift in business.
Whilst rates may now have peaked, it has shown business owners that contingencies should be factored into cash flow projections, to be able to cope when things do get tough. In our article in 2017 we set out the need for businesses who borrow funds to make sure the terms are affordable and can be sustained long term if there are challenges on the way. We advised best practice of reviewing cash flow regularly, along with ensuring sales invoices are raised and paid on time, and supplier prices are continually reviewed. If you need to purchase goods or services from a particular supplier, our advice was to consider asking them to agree fixed prices for a period of time.
That advice is as relevant now as it was then. Anything that can increase income, reduce costs and improve cashflow should be the focus. I often see directors afraid to chase invoices in case it scares off a customer, but a customer that does not pay is not a customer anyone wants, and at the same time the same directors accept increasing prices from suppliers. Focussing on the things that directors can control gives the company its best chance of survival and being able to cope with the external factors, such as interest rate rises, that it can’t.
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