What effect do increases in interest rates have on small businesses?

Thursday 11 May saw the Bank of England increase interest rates for the 12 consecutive time in a bid to combat the high inflation we are experiencing in the UK.  The increase of 0.25% takes the base rate to 4.5%, its highest level since 2008.  In this blog post we look at what this rise means for small businesses. 

Image of increase in interest rates

The areas we cover are:

  • The effect of increases in interest rates on borrowings
  • The effect of increases in interest rates on savings 
  • Interest on late commercial payments 
  • Interest on overdue and early tax payments 

The effect of increases in interest rates on borrowings

The major concern for many will be the impact the rise will have on any borrowings your small business has. 

If your small business has a commercial mortgage that is not covered by a fixed rate product then the latest increase in base rate will have an effect on your mortgage repayments that you will need to build into your budgets.  

Most commercial loans will have an interest rate calculated at the time of the initial agreement which is fixed over the term of the loan, for example Bounce Back Loans have a fixed rate of 2.5%.  However, there are some products where this is not the case.  We have seen loan account products which have preapproved the borrower up to a certain limit which they can flexibly draw down against and which have a variable interest rate.  The same is usually true for overdraft agreements which will state an interest rate of x% over base rate, meaning as the base rate goes up, so does the cost of the borrowing. 

For products such as corporate credit cards the provider will usually have the ability to vary the interest rate as they wish.  The good news is that there are multiple providers and you can simply go to the market to find the best rate.  Some may offer an initial incentive rate that applies when you open a new account.  Make sure compare any balance transfer costs (usually a percentage of the balance) against the interest saved to make sure it is worth the move. 

If the financial forecasts for your business expected future borrowing, then you will want to revisit what is budgeted as the loan repayments as these are likely to have increased.   

The effect of increases in interest rates on savings 

An interest rate increase will mean larger returns on monies your small business has in a savings account. The exception can be term savings account which lock in your money for a specific period of time at a rate agreed at the start, however we would suggest looking at the cost of breaking the agreement versus the increased return you may see on an alternative account at today’s rates.  Unfortunately any increase to interest rates on savings accounts happens a lot slower than increases to rates on borrowings, so don’t expect an immediate response from your account provider.  

A word from our owner:

Image of Dan Edwards, owner at Veritons

“I started Veritons in September 2022 after leaving a Partner position in a large top ten practice.  We are a firm of accountants based in Medway, offering accounting and tax services to small businesses.  I have always focused on owner managed businesses in my career and could see that the time management practices of many firms resulted in a reduced service for the clients.  At Veritons we do not record our time, and believe every business should receive a high quality service including advice specific to them – not to just send out a monthly newsletter and expect them to shout.  By not recording our time we can have close relationships with our clients, thereby ensuring this high quality is maintained throughout.  If this sounds like something that could benefit your business please contact us for your free discovery meeting.”

Interest on late commercial payments 

If you have made a sale to another business and they are over the payment terms of the invoice then you can apply what is called “statutory interest” to the amount outstanding.  Statutory interest is set at 8% over the Bank of England base rate which means (at the time of writing this blog post) the statutory interest rate is at 12.5% per annum.  The increases we have seen in the base rate may well make late payers sit up and think, so we would encourage you to highlight this entitlement to any slow paying business customers.  The Small Business Commissioner have a great statutory interest calculator and guidance of how to apply it on their website, which you can check out here.

Please note that if your customer contracts state a different policy of interest on late payments, then this will override the statutory interest legislation. 

Interest on overdue and early tax payments 

The rates that HMRC use are linked to the Bank of England base rate and are as follows:  

  • Late payment interest = Base rate plus 2.5% 
  • Repayment interest = Base rate minus 1% (with a minimum rate of 0.5%) 

HMRC apply the increase in base rate from the end of the month, which means from 31 May the rate for late payment will be 7% and the rate for repayment interest is 3.5%.