Profit margins squeezed further as interest rates rise further

by Lee Murphy, managing director at The Accountancy Partnership

The Bank of England has raised interest rates 0.5% this month to 2.25%, equalling levels last seen during the 2008 financial crisis in an effort to stem rising inflation.

Lee Murphy, managing director at The Accountancy Partnership, explains, “this could spell trouble for millions of businesses that rely on credit to run their organisations. While on one hand small businesses have had encouraging news about energy price caps, they still face tough times ahead due to the cost of borrowing money increasing.

“This change will squeeze profit margins even further but there are some steps that businesses can take to reduce their reliance on credit facilities, such as improving cash flow and reducing repayment times, consolidating loans, restructuring, and seeking grants and financial support.

“Some businesses may also see a decline in sales with consumers likely to spend less and save more, putting the strain on business to do even more to make their products and services attractive to buyers.

“Loans are a lifeline to many businesses and will now be loaded with more interest. Combined with inflation which is pushing up prices of fuel and other goods, the cost of business may become too much for some small businesses. Proof of this can already be seen in the number of registered companies filing for insolvency in August 2022 – 43% higher than the same month last year. Not only is this problematic for the future of businesses themselves, but also for business owners, 83% of whom already say they worry about their financial situation according to The Accountancy Partnership’s research into SME owners’ mental health.

“To try and ease some of the stress, small businesses might find it useful to review their business plans to help they be more resilient in the current climate. It’s also worth looking over financial reports to see if there are any costs that can be pruned back or made more efficient, and to help with forward planning. It’s also essential that owners are aware of the risks of borrowing in a high-interest environment.

“Loans already taken out should be on a fixed interest rate so will not be impacted, but new lending on vehicles, machinery and commercial property are set to be at much higher rates.