Interest rates: What businesses need to know

Interest rates dictate both the cost of borrowing and how high the rewards are for saving.

So, if you’re a borrower, the interest rate is the amount you are charged for borrowing money, shown as a percentage of the total amount of the loan.

If you’re a saver, the interest rate tells you how much money will be paid into your account, as a percentage of your savings. 

The interest rates banks and building societies can offer savers or charge loanees are closely linked to the Bank Rate. 

The Bank Rate can go up or down depending on what the Bank of England's Monetary Policy Committee (MPC) feels is in the best interests of the UK economy. 

Currently, the Bank Rate is rising very quickly to combat inflation.

If you are currently looking for a business loan to support the growth of your company, the terms and conditions attached to that loan and the total amount you have to pay back could be subject to change as interest rates rise.   

You shouldn’t expect any change to your terms and conditions for existing loans if you’re on a fixed rate, but if you’re on a variable rate, then your repayments may be higher.

If you're planning to borrow now or in the future, what you need to think about is whether you could still afford the loan if interest rates continue to rise in the months ahead.

A 3% interest rate, for example, would mean that debt finance offered by banks and other lenders would be considerably more expensive to service. 

So, as a first step, you should be factoring the potential for higher borrowing costs into your business plan.

Many businesses borrow to invest so if you're a company that sells products and services primarily to other companies (B2B), then you should consider how interest rates could impact your business development pipeline.

It's worth having conversation with all current and prospective customers to find out how their investment plans might change if rates continue to rise. 

If you get the sense that they may be unable to move forward with their plans, then you should adjust your forecasts accordingly and see whether there are other sales opportunities you should be exploring. 

In situations like these, it helps to have customers operating in a wide range of sectors, so consider how you can diversify your offering to attract businesses of all shapes and sizes. 

One of the knock on effects of higher interest rates is their potential to trigger economic contractions and recessions. 

If you're a company that sells primarily to consumers, then you should consider how an economic slowdown could limit their spending power and weaken demand for your products and services. 

With inflation currently running at a very high level, this is especially important.