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The end of 'easy' money

by Eamonn McMahon

Last month the Bank of England announced a rise in its core benchmark rate from 0.1% to 0.25%.  Most economists expect another rise in just over two weeks and then, at least another two upward adjustments in 2022.

While it is true that most small business finance products are offered on a fixed rate basis, many are short term and when refinancing is needed or new finance is required, the higher core bank rate will lead to higher costs for SMEs. Furthermore there is a second order effect, where lenders will seek even higher rates to compensate for the higher default expectations linked to higher interest rates.

This would matter less pre-pandemic when SMEs had relatively little debt but that changed over the past 18 months.

The image above is from a recent Bank of England and shows that a much greater portion of SMEs now have significant debt on their balance sheet.

It is also worth bearing mind that the 12 month repayment holidays that featured in CBILS and Bounce Back Loans have in most cases recently ended, or are due to end soon. The reality of the new year is that SMEs are having to make substantial payments and this is increasing the burden.

And the image above from the same report, also shows how the burden has increased dramatically post COVID.

But rising finance costs is not the only of the pressure factors that small business faces in 22. Inflation is back on the block. To quote Bloc Party, a rock band from London..

“The price of gas keeps on rising, nothing comes from free…make like a stone, make like a plant, I can tell you how this ends” (matched to a catchy bass riff)

The bad news is that general inflation is expected to get substantially worse before it gets better. And while general consumer inflation rose to 5.1% last month, small businesses in certain sectors are facing cost inflation of up to 15%, often centred on costs with little flexibility and high termination costs like skilled critical staff and fixed energy contracts. Insurance costs are also rising.. with industry expectations of an increase over 10% in 2022 for most business products.

Another squeeze will come from reduced government support. This is inevitable if the promised increases in spending to support the health and social sectors are to be followed through. On a local level, business rates are packing a punch again as councils struggle to balance their books and National Insurance rises for employers will kick in from April.

And as context the ability of government to support business in 2022 is far less than it was pre-pandemic. UK Government debt is fast approaching £3 trillion or c. £80k per working person, having quadrupled since the early 1990’s and the cost of bearing that debt (with a decent proportion now inflation linked!) is only going to increase.

So, what to do!

Steps you can take in 2022 as a small business director to fend off increased costs and higher finance rates:

  • Avoid the temptation to pay over the odds for staff in what will be a hot employment market.
  • Keep a reasonable amount of liquidity, a good amount of cash, available at all times. Better to have tea in the pot than a bankers snot as they say in Cornwall.
  • Continue to make the most of any available COVID support / small government support. Innovate UK for instance are launching a new calculator so you can discover available support. 
  • Leave cheap debt in place.. particularly bounce back loans. It probably doesn’t make sense to pay off anything with an interest rate under 5% given inflation is hovering there and your cost of capital will probably increase in the 12 months ahead. 

Conclusion

It’s no secret that while some struggled, many small businesses and bigger businesses have done surprisingly well from the extraordinary circumstances and unusually accommodative finance that was afforded over the past couple of years. This period is now well and truly over. We are all glad to be coming to the end of this pandemic but the next couple of years will be challenging and it's important to be prudent and take steps to manage your business risk.

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