Rise After Rise

Have we seen the last of the Bank of England’s interest rate rises? TBC… but the impact of recent rises is starting to show within Northern Irish SMEs.

The decision by the Bank of England to increase the base rate to 4% in February is having significant implications for businesses of all sizes, but particularly local SMEs. By making borrowing more expensive, the increase, together with a number of other factors, is having a drag on economic growth.

Amid the choppy economic climate, companies are doing their best to keep their head above water and ensure they have a big picture view of the health of all aspects of their business including their supply chain, order book, who their partners are and what the end-user is looking for.

For companies, this has increased the cost of borrowing further, at a time when many are anxiously trying to stay cashflow positive. Many business owners are, quite rightly, turning to cashflow modelling to take account of cost volatility, and scenario planning for the 2023. Looking further ahead, one must hope that if and when demand slows in certain sectors and industries, inflation may start to come under control.

The flip side to regular interest rate rises is that the latest inflation figures suggest that the Bank of England’s aggressive tactics are starting to yield results, with the level of inflation falling marginally in recent months. Marginally is the key term… inflation remains at 10.5% at the time of writing and alas it doesn’t appear that interest rate rises are having the overall desired effect.

Lack of available finance for SMEs

The increases undoubtedly act as a wake-up call for SMEs to review their existing lending situation and ensure they are prepared.

The recent marginal slowing of inflation suggested that we may have reached a peak but still represented eye-watering numbers. Indications on the ground suggest that the start to 2023 has been difficult for many SMEs. Undoubtedly. Demand for working capital is continuing to rise as businesses desperately require liquidity to counteract supply chain issues, increases in wages and a worsening cost-of-living crisis.

Recent research shows that over a fifth of SMEs that required external finance over the last two years, could not access it. Further, over a quarter have had to stop or pause an area of their business because of a lack of access to finance.

As SMEs continue to struggle with obtaining external finance, this lack of availability is costing them and the local economy in terms of growth at a time when it is needed the most. The amount of growth that is being sacrificed is significant and will require new solutions which are designed to address this funding gap.

Other factors

As if recent interest rate rises weren’t enough, the blanket increase in input costs, wage inflation and utility costs have left many businesses in certain sectors on their knees, particular businesses which can’t pass on the price increases to the end user. Until inflation is under control, worryingly, that does not show any sign of slowing.