As small and medium-sized businesses consider the impact of interest rate rises, SmallBusiness.co.uk and Alexander Baldock, commercial director of Barclays Business Banking, outline their top tips for managing debt as costs increase.
As small and medium-sized businesses consider the impact of interest rate rises, SmallBusiness.co.uk and Alexander Baldock, commercial director of Barclays Business Banking, outline their top tips for managing debt as the cost of doing business increases.
Take a strategic approach to expenditure - As businesses expand rapidly, growth can be more haphazard than planned. Faced with demand, and lacking a professional finance function, many firms finance themselves or make purchasing decisions ad hoc, for example by servicing cash flow gaps via an overdraft, or purchasing commercial vehicles at point of sale. A business can cope with this in the short term, but as interest rates rise, a more strategic approach to expenditure is needed to manage debt effectively.
Be proactive and seek advice early - Don’t just ignore debt problems, attack them head on. They’re not likely to go away and could end up turning into serious issues. Proactive management of debt and associated finances should be an essential part of every business strategy and in an environment where interest rates are rising, this is more important than ever.
Those companies that have unstructured debt could experience more difficulty borrowing in the future, making it hard to maintain current business performance and to achieve future growth. Getting help where you most need it at an early stage will enable you to keep on top of your finances.
Factor in the finance implications of your business plan - Are you planning to expand, trade abroad or hire more people? Do you need certainty in terms of cost control over the coming months? If yes, then one option is to hedge your bets by capping interest rates on, say, half the amount borrowed.
Banking services are available that help businesses protect themselves from interest rate rises, but benefit from rate reductions. In many cases, the best option could be simply to fix interest rates on borrowed sums, especially where cash flow is unpredictable.
Look for other opportunities to save costs - It's worth remembering that there may be other opportunities to make cost savings within a business beyond more effective management of debt. Making use of factoring services to manage, say, cash flow, can be more cost effective than an overdraft. Likewise, using Contract Hire for the purchase of fleet vehicles where the arrangement includes maintenance costs removes the responsibility of day-to-day cost control from the business.