What do rising interest rates mean for SMEs looking to grow?

The Bank of England has raised interest rates again - this time from 1.75% to 2.25%, taking borrowing costs to their highest levels since the 2008 financial crisis.

Inflation is is currently at 9.9% and at its highest level in nearly 40 years.

The Bank also forecasts that the UK economy is already in a recession.

Whilst this affects the entire economy, SMEs in particular are feeling the impact of inflation rates and a cost-of-living crisis continues.

The interest rate has a ripple effect that affects both consumers and businesses.

From real estate purchases and leases to vehicles and fleets, machinery purchases to food on the shelves - everyone along the supply chain is under pressure to either raise prices or absorb rising expenses.

Add in a hike in fuel costs and you have an environment that SMEs need to take notice of.

The impact of rising interest rates

Small companies might have sighed a sigh of relief as the UK economy began to open back up in the first few months of 2022.

After two years of on-off coronavirus lockdowns, the restrictions were being lifted and the business landscape appeared positive.

However, just as one problem faded away, new significant issues have arisen for SME owners.

The most serious problem is runaway inflation, which the Bank of England is attempting to control by raising interest rates.

The combination of rapidly increasing costs paired with successive interest rate raises has put pressure on business owners for two reasons:

The cost of doing business; buying raw materials, paying wages and general overheads – has shot up.
The cost of business loans; rising interest rates restricts financing options for SMEs, especially those already in debt

The interest rate is a tax on borrowing, so it disproportionately affects SMEs over larger-sized businesses in their early phases of development, since small businesses in the early stages of growth rely more heavily on funding.

The cost of borrowing money has gone up, which means that UK SMEs with company credit cards and existing loans will have to pay more on interest, causing cash flow to be reduced and overhead expenses to rise.

Consequently, navigating higher rates will be particularly difficult for businesses that have already struggled due to the pandemic and have accessed financial loans for support - it will also be harder for startups to access funding.

Although the interest rate increase wasn't a surprise, it doesn't make it any easier for SMEs to navigate. This was not the first time this year that rates have increased, and it won't be the last.

Unlike with the pandemic, which seemed to appear out of nowhere, SME owners now have a little more time to prepare for the stormy seas ahead.

Dealing with interest rates rise

It is well understood and accepted that access to financial support is critical for small companies to develop and grow.

A lack of funds, on the other hand, is frequently the cause of a company's stagnation or even bankruptcy.

As every SME business owner will know, obtaining funding from traditional banks can be challenging, especially if your business doesn't have a long, proven track record.

So what can business owners do?

Some will re-mortgage their homes, others will take loans from friends and family or even use their personal savings.

Whilst these options are OK for the short-term, they're not ideal when a business is in trouble or needs to scale.

Credit line safety net

A business needs a credit line that it knows will be accessible in the event of an opportunity or a large customer not paying, allowing it to take advantage of the chance or stay afloat until money comes in.

This safety net is worth its weight in gold, and we saw it during the pandemic.

For example, businesses that were able to pay employees had time to innovate and change their model, while others used money to set up e-commerce shops.

Many small business owners are under the impression that only after a crisis occurs should they seek financing.

In fact, it should be the other way around.

When the market is still strong, applying for SME funding can get you better terms. The terms and repayment conditions will not be as advantageous if the entrepreneur waits until the company is about to close or is going through very challenging times.

In most cases, the amount of financing available will have decreased.

When a company undergoes bankruptcy proceedings, it typically has to pay off its debts before any remaining money can be spent on operations.

When the interest rate rises, it may seem odd to seek out funding channels proactively. This makes servicing the loan more expensive.

However, there will be support out there, with funders offering flexible loan terms according to your business merits, increasing your ability to service the repayments.

Reduce costs and save cash

When interest rates rise, it's important to look at how you can reduce any operational costs.

For instance, can you renegotiate your lease? Are there any bulk order deals available? Should you switch suppliers?

At the end of the day, it's all about money in and money out.

The more appealing that difference is to funders, the more attractive the company becomes, but crucially, the more capable it is of weathering tough times and repaying its debts.

There is no desire to raise costs. And SME owners are afraid of losing customers if they absorb input expenses.

However, margins can only be reduced so far. Consider releasing a few price raises on a single line of products or services to see how people react - if consumers a supportive, you have room to boost your margins.

Finally, as basic as this may sound, do all you can to save money in order to create a financial buffer between your business and the unrelenting world around it.

When things get tough, an SME with several months of operational cash set aside is more likely to survive than one without it - doing so will open more attractive funding lines for businesses - before they need it.

Once those funding lines are open, there are many ways to develop the business, such as investing in new equipment or software to improve operations, or expanding into new markets.

The bottom line

As rate rises seem to be increasing, now is the time to begin doing your homework.

Other providers will give a more flexible, tailored approach than high street banks would to businesses that don't meet their predetermined requirements.

Private lending firms can offer solutions with payment terms that suit your unique business, as opposed to a set agreement which simply will not work.

SMEs are the engine of the British economy, and their needs must be supported at every stage.

Despite rising interest rates being difficult for many, those who plan ahead will find their road to grow considerably smoother.

If you’re looking for funding to mitigate rising costs, start your application process here.

About SME Capital

SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market, and have dedicated Regional Directors based across the UK. By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions.

The market we serve

SME Capital provides SME funding for businesses which are integral to the UK economy. We support UK businesses able to demonstrate recurring revenues and a track record of profitability. They often have unique needs that fall between traditional lending routes and the automated response from online only business loan lenders. We cater to businesses with strong cash flows, assessing each business on its strengths, rather than focusing on the asset base.