What rising interest rates mean for start-ups

Amid rising living costs and inflation at a 40-year high, the Bank of England has raised interest rates to reduce inflation and return it to a stable level, which is crucial for a healthy economy.

Since December 2021, the Bank of England’s Monetary Policy Committee has increased interest rates nine times, with the hike in December 2022 taking the base rate to 3.5%, the highest in 14 years.

Such economic conditions mean several challenges for existing small business owners and those looking to start a new venture.

The cost of materials is high, access to finance is more challenging, and consumer spending is decreasing in many sectors.

But despite all this, there are steps founders can take to help protect their companies and bounce back when the economy recovers.

Data from previous economic downturns shows small businesses often lead to post-crisis growth.

Read our guide on 10 reasons to launch a business in a recession.

How increased interest rates impact start-ups

Rising interest rates can impact small businesses and start-ups in several ways:

1. More expensive finance

Rising interest rates may result in business owners with loans or credit cards having to pay more interest, impacting cash flow.

If your business owns property, you may also face an increase in your mortgage payments.

The increased costs can mean it takes businesses longer to pay loans off, which can affect financial objectives and force founders to delay growth plans.

2. Restricted access to funding

With more expensive funding due to higher interest rates, businesses can find it harder to obtain finance.

Lenders may be less willing to lend to new start-ups, and it can be more challenging to access short-term funding to deal with increased expenses or business expansion.

3. Reduced consumer spending

Increased interest rates see mortgage payments and other costs increase, which leaves consumers with less disposable income to spend on products and services.

Businesses offering luxury or non-essential products can be particularly hard hit at these times.

4. Higher supply chain costs

During times of high-interest rates, the costs of goods rise, so suppliers often follow suit by increasing their prices and changing their payment terms.

This can impact a business’s cash flow.

5. More late payment

B2B companies can be hit by increased late payment of invoices when interest rates are high.

Clients may face financial difficulties, meaning they are slower to pay their bills.

As well as the adverse effects on cash flow, business owners may have to spend more time chasing invoices.

Read our guide on how to manage and protect cash flow during difficult times.

How to protect your start-up from rising interest rates

Taking steps to plan for rising interest rates and protecting your business from the negative impact is crucial.

There are several options you can adopt to help protect your business:

1. Review your business plan

It’s a good idea to revisit your business plan to check that your objectives are still relevant in current conditions.

It’s crucial that you know how the challenges caused by the economic downturn will impact your start-up.

You need to understand all your business’s costs, including loans with variable interest rates that could lead to higher repayments.

It’s a good idea to try and predict how increased interest rates and falling customer spending might affect your plans and cash flow.

This action will help you determine your business’s sales, costs, and profits, making it easier to set budgets.

For more advice, read our guide to business forecasting during periods of high inflation.

2. Reduce your costs

To maintain your cash flow, you could look for ways to reduce your spending.

If you’re facing increased supplier costs, try negotiating a better deal or finding a cheaper supplier.

Other ways you can cut costs include:

• shop around for a cheaper credit card
• move to a more affordable office or switch to working from home
• review subscriptions to check whether they are essential or can be cancelled
• cut back on travel costs by organising more meetings online instead of in-person or using cheaper transport options and hotels; booking travel earlier often means lower prices
• reduce energy costs by taking actions such as sealing windows and doors to prevent heat loss, switching to energy-saving lightbulbs, and installing automatic lighting
• outsource processes such as accounting, human resources, and marketing instead of running them in-house.

Read more on reducing costs and increasing profits and get some helpful tips for outsourcing expertise.

3. Adjust your prices

A period of rising interest rates is the time to review your pricing strategy.

With consumers also facing financial difficulties during an economic downturn, raising prices might seem counterintuitive.

However, it may be necessary to cover your costs and maintain your profits.

If you’re offering a premium product or service, it may even be beneficial for reaching customers who still have the budget and desire for luxury brands.

You can do other things, such as bundle pricing, which involves grouping individual products into a single-priced bundle that you sell with a discount.

Read more about the pros and cons of raising your prices.

4. Fixed-rate, flexible and alternative funding

There’s no escaping that rising interest rates may make it harder for start-up businesses to access funding.

However, if you decide to apply for finance, business loans with fixed interest rates might be a good option to help you through challenging times.

A locked-in rate over several years means you have the certainty of being able to budget for the repayments and not be hit by increases should interest rates rise further.

You might also obtain funding from alternative lenders with less strict eligibility requirements than traditional banks.

At the same time, some finance providers offer flexible lines of credit that you can use to settle an invoice or other bills, which you then repay over several months.

Find out more about Start Up Loans and whether you could be eligible for a loan.