Rising interest rates - part 1
One result of control over interest rates having been handed
to the Bank of England, just over ten years ago, is that this
has become almost the only weapon today used to control inflation.
In the past, more attention was paid to controlling government
spending, managing exchange rates and limiting growth in the
money supply; but as is becoming clear, money supply is running
almost out of control and the Monetary Policy Committee (pictured)
has nothing to fight back with except hiking interest rates.
The problem is that higher interest rates can result in cost-push
inflation, as employees demand more income to cover their
borrowings. They also make for a stronger pound (unless other
central banks also increase rates) thus making Sterling stronger
and increasing the price of exports (while making imports
cheaper) – neither of which helps British industry.
However, the main threat – particularly to the SME
sector – is that higher interest rates increase operating
costs which will either squeeze margins or make it necessary
to charge higher prices.
Businesses require money for various purposes, including
to cover money owed to them by debtors and to finance business
expansion plans. Traditionally, this has been covered by bank
lending, either through formal loans or, more usually, by
an overdraft facility. However, there are other ways of raising
capital that can be considered.
Sources of development capital
Inertia is a great tool for high street banks. They get clients
and then start charging them more and more – especially
if they want to do anything other than banking and paying
out cheques – in the hope that moving will be too much
effort. Yet there are many banks offering more attractive
rates for business customers and it can be well worth considering
these; especially as some have introductory offers that can
be worth hundreds of pounds.
It is not, of course, absolutely necessary to change banks
in order to borrow; there are specialists in commercial lending,
especially when a specific purpose is in mind. For example,
if a factory is to be extended or additional plant purchased,
a dedicated finance scheme could possibly work out cheaper
than the bank.
An alternative could be to consider a lease-back on existing
plant. Rather like equity release in the home market, this
enables businesses to realise capital tied up in existing
property, while still benefiting from its use.
An additional option for many businesses might be to use
the directors’ Small Self Administered Scheme (SSAS)
to provide finance at commercial rates. The benefit of this
is that the interest is paid to the pension scheme in addition
to any pension contributions – which means that the
£225,000 per member limit can actually be exceeded.
Ways of financing debtors
One of the problems facing most small businesses is that debtors
pay too slowly, creating negative cash flow. A solution could
be to offer discounts for prompt payment; but there is always
the danger that customers will take the discount but still
pay late! One way round this might be to grant the discount
off the next bill. So if £2,500 is paid within the 30
days allowed for settlement in Month 1, 5% (i.e. £125)
might be deducted from the invoice for Month 3 (as the payment
will be received within Month 2).
An alternative is to consider factoring for debts, but this
can be expensive and some customers do not like being asked
to pay a third party, even if the invoice is actually issued
by the supplier of goods or services.
The "third way"
A “third way” of finding working capital could
be to consider seeking new investors. While this can result
in watering down ownership of the business, it can also inject
new business ideas and even help succession planning.
Where can my clients go for help?
We would be pleased to discuss your clients’ borrowing
needs; please contact us.
|
