Low interest rates, how does that affect business in the UK?

Interest rates seem to dominate the news these days. They are high, they are low, people are spending more, people are spending less. When it comes to businesses, low interest rates benefit them in many different ways, some from the expenditure of their customers and others from their own financial aspects. Without further ado, here is a brief overview of how low interest rates are currently affecting business in the UK.

First of all, the general consensus is that low interest rates should mean that the cost of borrowing is reduced. A drop in mortgage rates can mean that consumers have more disposable income than before, and they spend it. More customers with more money adds to a surge in sales and higher profits for all businesses. This is the ideal scenario to give the slowly recovering economy a real boost as well as give that business more bargaining power when it comes to the supply chain.

Low interest rates also mean lower repayments on business loans. In short, if a business secures a loan, to expand for example, the repayments on that loan are currently at an all time low. Theoretically, they should then pass on that saving with lower prices, and combine that with the increase in spending power previously mentioned, the future should look rosy.

The question many are asking, however, is if this is the case why are so many large companies still folding. There are multiple answers to this question, the main one being that they borrowed large sums when the interest rates were far from favourable, and when the recession kicked in they weren’t making the sales they needed to cover all their overheads, the loan repayments weren’t being made, and the administrators were called in.

Another scenario is simply bad financial management. A company up to its eyes in debt may think that putting its prices up will bring in the much needed revenue but the tough economic climate has made consumers shop around more and also go for cheaper alternatives. This in turn means empty shops, silent check outs and a serious lack of traffic to websites. No business, however well established, can maintain this for long, HMV and Comet being prime examples.

When you look at the bigger picture, low interest rates should be hugely beneficial to businesses, but, for small businesses in particular, the temptation could be to borrow way more than they actually need. It is very tempting for a business that is enjoying success in one location to believe they can build on this by opening several other branches in quick succession. Over expansion is one of the most common reasons given for small businesses folding.

The message to all businesses is the same as you would give to an individual who suddenly has access to more money than ever before; use your common sense. Even with low interest rates those repayments can quickly become millstones.