The prices in the UK kept rising rapidly over the last year and set a current inflation rate of 10.1%. The Bank of England expects to bring down the inflation rate to 2% in the next two years. To stop prices from rising at a faster pace, BoE, the UK’s central bank, put up the interest rate to 1.75% in August 2022.
When interest rates increase, the cost of borrowing money rises, changes in credit card and mortgage repayments to consumer spending, and inflation affect a country’s economy. The interest hike in the country is an added challenge to businesses of all sizes. This article will describe how UK startups deal with the rise in interest rates and inflation.
Hire Startup Accountants in UK
Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
Table of contents
- How is the rate of inflation changing in the UK?
- How is inflation affecting the interest rates?
- How will the rise in the interest rate and inflation affect businesses?
- How should startups respond to increasing inflation and interest rates?
- Wrapping up
How is the rate of inflation changing in the UK?
The Bank of England Monetary Policy Committee has mentioned that the UK is hitting its highest level of inflation in 30 years. It is expected to reach 13.1% by the year’s fourth quarter.
In early February of the year, the BoE forecasted the peak point of the CPI inflation rate to be 7.25% in April. Later in March 2022, the Office for Budget Responsibility forecasted the peak point of CPI inflation rate at 8.7% in the fourth quarter of the year.
On May 5, the BoE forecasted the peak point to be slightly over 10% in Q4, 2022. In July, the consumer price inflation was 10.1%, surpassing all the forecasts made during February-May.
Why is it so high?
● The gas price has doubled since May and is one of the main reasons for high inflation in the UK.
● Higher-priced goods are purchased abroad due to increased demand, especially during the Covid pandemic.
● Employers are burdened with paying large salaries to attract job applicants as fewer people are looking for work post-pandemic.
● Supply chain disruptions as a result of COVID-19 related restrictions.
How is inflation affecting the interest rates?
The BoE is increasing the interest rates to bring down inflation to a target of 2% within the next two years.
As the interest rate increases, it becomes expensive for people to borrow money and encourages them to save. The tendency to spend less means people will see a slower price rise which helps to keep the inflation rate low.
The factory gate prices increased to 14% in April from 11.9% in March and are at the highest since 2008.
The input prices like commodities rose to 18.6%.
Food and non-alcoholic beverage costs rose to 12.7% in July 2022, from 9.8% in June of the same year.
The recreation and culture annual rate increased to 5.6% in July.
The miscellaneous goods and services prices rose to 4% in July from 3.1% in June 2022.
Restaurants and hotel prices rose to 9.0%, and the annual increase for transport was 15.1% in July 2022.
What is an interest rate?
● For borrowers, it is the amount charged for borrowing money and is depicted as a percentage of the total loan amount.
● For savers, it is the amount paid on their account as a percentage of their savings.
Small interest rate changes can have a bigger impact, so you must keep an eye on whether they are rising, falling or staying constant.
How will the rise in the interest rate and inflation affect businesses?
- Increased financing costs:
As the interest rates increase, businesses with credit cards or existing loans need to pay more to clear debts with high-interest payments. - Increased energy prices:
Inflation affects almost every aspect of the business lifecycle, from the price of a mortgage to fuel costs and everything that directly impacts business. For example, if your corporate building requires heating, you pay more on energy bills when gas prices go up.
Similarly, if you are offering fuel expenses to employees, an increase in the price of petrol or diesel will heavily hit your business.
If you are a luxury or leisure retailer, your revenue can hit directly when the cost of living increases. It is not the case for essential or basic needs services.
Businesses of any type and size will receive a hard blow during rising in inflation and business-related costs.
How should startups respond to increasing inflation and interest rates?
1. Reconsider your business plan
Revise your business plan to identify if you are ready to withstand the current market scenario, and access all your debts: types and levels.
You must stay aware of the risks of borrowing money and paying large interest amounts. If you opt for a shorter-term loan that ties with your cash flow, you may expose yourself to more significant risks.
2. Focus on the supply chain
When prices increase or payment terms and account payable change, businesses must focus on their key partners like consumers or suppliers. Even when you are insulated from the price rise or other changes, others in the supply chain may not. The increased interest charges for your supplier may result in a rise in the price of supplies.
The rise in interest rates with inflation drives companies to increase their price of manufacturing, distribution and business services, impacting the entire business supply chain.
3. Buy goods in advance
Experts believe inflation will rise by 2% before October, which means the cost of goods will increase. Small businesses can buy more inventory and stock to avoid inflation-driven price rises.
If you have sufficient funds, use them wisely rather than stocking them and wait for another price increase. Additionally, you will stay prepared for any unexpected demands for goods under any condition.
4. Look for long-term and fixed contracts with suppliers
Negotiating long-term and fixed contracts with suppliers will lock you into a fixed contract. That means you can control your finances better, knowing your expected outgoing during a specific period.
Plus, it helps you balance your books, understand cash flow, mitigate the risk of exchange rate differences during foreign currency transactions, and a few others.
5. Invest in technology
Startups may invest in technologies and automate their processes, which reduces manual labour and business overheads.
The government has introduced their Help to Grow scheme for businesses to learn to use technology in business. It allows you to use tools that help minimise inflation’s impacts. Plus, you can identify trends and new patterns beforehand to combat an upcoming situation.
Hire Startup Accountants in UK
Work with a London-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
Wrapping up
Every business owner must prepare to fight the effects of inflation and reconsider their business plan to avoid paying higher interests. Seeking advice from an accountant or a consultant can help businesses understand the proper steps to protect business from possible hardships in the next few months.
