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This podcast selection is taken from a series of Business Hub radio shows broadcast on Star FM between February 2011 and October 2014 with advice from basic book-keeping through to crowd funding, directors loans, cashflow and a whole lot more!

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Business Trouble - your choices

Are you prepared for an interest rate increase?

The Business Hub Show - 19 October 2014

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This week on The Business Hub Garry Mumford discusses with Steve Elsom (Area Director, Lloyds Banking Group) the possible implications of an interest rate rise in the UK and how business owners and managers should react.

Listen to the Podcast. The main points from the discussion include;

  • The UK bank base rate has been unchanged at 0.5% (or 50 basis points) since 5th March 2009 … some five and half years. Never before have we seen such a sustained period at such an unprecedented low rate. It is unusual not to see the rate change much more regularly in modern times, let alone to see it stuck at this historical low.
    Quite a contrast to the 17% that was set on 15thNovember 1979 … nearly thirty years before. Indeed during the eighties the lowest rate was 7.375% and most of the time it was much higher than that. During the nineties it only managed to get down to 5% for a short period.
    How conditioned have we now become to such a low rate?
  • The issue is when will it increase and by how much? It is inevitable that it will, it is just a matter of when, not if – when will be when Mark Carney, the Governor of the Bank of England, and his colleagues on the Monetary Policy Committee feel they can do it and the British economy can withstand it without going backwards. The UK is presently the fastest growing developed economy in the world, no-one will want to be responsible for changing that!
  • There appears to be a general opinion however amongst commentators that we will not see the higher “normal” rates that we have in the past. I have seen many suggestions that 2 to 4% might be the new norm rather than 6 to 8% that was perhaps more common in modern times.
  • So, the question is – are you prepared for this inevitable change that is on the horizon, and what should you be doing about it?

These are Garry's three tips that you might want to consider.

  1. Understand where you are now and how that might change.
    If you are servicing debt in your business what rate are you now paying?  It might be base rate plus the lenders margin which could be anything from a couple of percentage points to as much as 8 to 10, depending on the type of debt, its risk profile, security etc.
    It might have a minimum base rate level, so any changes may still be below that so you may not see change yet. Alternatively you may be finding as is happening quite a bit now that your lender is increasing their margin so it is not just an increase in base rates that may impact you – you may need to consider both parts of the rate you are paying as they both may be increasing.
  2. Having understood the deal – understand the impact of change.
    Calculate how your interest costs will change with changes in rates and how much that will cost you. How much of a change is that to where you are now. In some cases an increase in the base rate from its present 0.5% to say 2.0% could double your interest costs, in some cases it could be even more if your lender is also increasing their margins.
    What impact will this have on your business and how will you deal with it?
    However, it is not just the financial cost you should consider. It is possible that your lending includes covenants that demand for example a given level of interest rate cover – that is you have to have profits of a number of times the interest charge – which you could breach if the cost increases.
  3. Manage it down
    Now, having measured the issue, think about how you are going to manage it?
    What can you do now to minimise the impact of the inevitable increase in your business costs?
    Consider things like:
  • Repaying debt if you can;
  • renegotiating debt and the cost;
  • look at alternative ways of funding;
  • as we touched on a couple of months back look at how you can better manage your working capital so you reduce you cash need and hence your debt;
  • can you sell assets that you no longer need to reduce debt
  • … the list goes on.

 

 

 

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