This article was originally published on 23 June 2023. The article has since been updated and republished on 27 February 2025.

This guide offers a clear explanation of interest rates in a business context. You’ll learn how high and low rates can affect your operations and discover strategies to help your company adapt to potential changes in the financial landscape.

For both businesses and consumers, interest rates can show how much it’ll cost to borrow money with a loan or other type of credit.

They show what you’ll repay on top of the original loan – usually as a percentage of what you’ve borrowed.

On the other hand, interest rates can also show what your savings might earn when depositing money in a particular account.

Yet interest rates can have much wider effects on the economic and business climate. For example, high rates could make people less willing to buy goods and services on credit. In turn, that might hit demand and sales.

Higher business borrowing costs may also erode margins or force entrepreneurs to rethink their expansion plans.

Why do interest rates change?

Interest rates differ between lenders and products. For example, the interest on a business credit card could be very different to a loan. What’s more, they can change over time, usually in line with the Bank of England’s base rate. 

Also known as the ‘bank rate’, the base rate is the UK’s most influential interest rate. It guides banks and lenders when setting their own borrowing and savings account rates.

The Bank’s Monetary Policy Committee regularly reviews the base rate to keep inflation close to its official 2% target. For instance, if it feels inflation is too high, it may raise the base rate to cool down consumer spending. But if inflation is deemed too low, it might cut the rate to help encourage spending.

High or rising interest rates can have a wide-ranging impact on a business. Here are some of the main areas to watch out for.

Higher borrowing costs

Rising rates tend to make borrowing more expensive for a business. That’s because you’ll have to pay a larger percentage of your loan back as interest.

As a result, you may need to spend more time comparing interest rates and the different borrowing options that are available.

Cash flow

Higher rates could also squeeze the cash flow or margins of a company with existing debts.

Many business loans have a variable interest rate, which can go up or down over time. Even a small increase in these rates might make it harder to keep up with repayments.

In this scenario, you may wish to review your lines of credit to ensure you’re borrowing as cost-effectively as possible. 

Consumer demand

Consumers also come under pressure when interest rates go up. And this can have wider consequences for the economy and business revenues. 

For example, people may be less willing to spend on credit – hitting sales of big-ticket items or encouraging them to find cheaper alternatives.

Your business might also face increased prices from suppliers, as they pass on the costs of higher interest rates. This could force you to raise your own prices or review supply chains.

Investment decisions

As borrowing becomes more expensive, companies might be forced to rethink any plans to expand too. 

For example, investments in new technology or machinery, hiring extra employees, or launching overseas operations may all have to wait.

As we’ve seen, higher rates can make life more difficult for companies. The good news? Falling interest rates tend to have a more positive impact on business borrowing.

Cheaper borrowing

Low interest rates generally make it cheaper to borrow money and repay variable business loans. 

Smaller borrowing costs could free up cash flow for more useful business purposes or help fund strategic investments. They might give you the opportunity to expand into new sectors or invest in the latest equipment.

Consumer spending

Lower rates on mortgages, credit cards and personal loans could help boost the spending power of consumers, giving them more money to buy goods and services.

They might also feel more confident about borrowing cash towards big purchases.

Savings returns

On the flipside, falling interest rates could make saving less attractive to business owners. As interest rates dip on savings accounts, so do the potential returns on your nest egg.

This might impact your long-term financial planning and appetite to save. 

It’s not always easy to predict the Bank of England’s base rate decisions. However, business leaders can still take a few steps to prepare for any future changes.

Monitor the economy and revisit business plans

Following monthly inflation data and comparing it to the Bank of England’s official 2% target could help you gauge which way rates are likely to move in the future.

It’s also worth checking if your business plan and objectives are flexible enough to withstand any headwinds. 

Take a good look at your existing business strategy and consider whether it still applies. Assess the type and level of your debt. Try to prepare for every eventuality. And make sure you understand the risks of overextension when borrowing in a time of rising rates.

Review your approach to borrowing

If a rise in the base rate looms, it may be worth asking how you could diversify your income streams. 

Spending less on credit could shift valuable funds away from debt repayments, and more towards essential business operations.

Build an emergency fund or buffer

Paying into an emergency savings pot might help you deal with sudden financial jolts if borrowing costs rise at short notice. It could ease the strain of higher repayments and support your cash flow.

Optimise your borrowing with a financial adviser

Seeking advice from a qualified professional could help you to view your borrowing from a different angle. They might be able to suggest the most appropriate products for your company in the current climate.

Watch the value of the pound

Higher interest rates can increase the value of currency. If your business has income streams in foreign currencies, rising interest rates, and in turn rising sterling, could affect profits. 

Forward contracts can be used to mitigate the risk of exchange-rate differences where your business has foreign currency transactions.

Keep an eye on supply chains

Even as prices rise, and payment terms and accounts payable change, you might feel relatively insulated from the financial fallout. However, the same may not be true of key partners like suppliers and customers. 

Just remember that even if your company has no funding affected by interest rate changes, your suppliers may do so. So, your costs could increase to cover their higher interest charges. 

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