How will rising interest rates impact growing businesses?

Inflation is soaring. The Bank of England is considering further rate rises. Sharon Bonfield of St. James's Place looks at the options
Sharon Bonfield
A breadmaker removes fresh bread from the oven

The early part of 2022 was seemingly time for small business owners to breathe a sigh of relief. The UK was moving forward with it’s ‘living with Coronavirus’ plan, national lockdowns looked to be ending and legal restrictions were being lifted.  

The UK economy began to open up again and the outlook for businesses was positive.

Yet, it now appears this period was only a short reprieve. Alas, just as one crisis has started to fade, a number of other significant challenges for entrepreneurs have taken its place. Perhaps the most pertinent is runaway inflation, which the Bank of England is attempting to control by raising interest rates.

Sharply rising prices combined with successive increases in interest rates has put pressure on business owners for two reasons. Firstly, the cost of doing business – buying raw materials, paying wages and general overheads – has shot up. Secondly, rising interest rates mean the cost of business loans will go up, which restricts financing options for companies, especially those already in debt.

“The interest rises… will pile yet more stress on small-business owners struggling with debt,” says Mike Cherry, National Chair of the Federation of Small Businesses (FSB). “The hope, against a backdrop of spiralling utility bills and surging inflation in the round, is that it goes some way to putting the brakes on rising prices.

“The back-to-back rate increases will mean more pain for all those with personal and professional debt that carries a floating rate.”

The situation is certainly precarious. On 5 May, the Bank of England’s Monetary Policy Committee (MPC) increased interest rates to 1%, its fourth consecutive increase.

The Bank has also warned that inflation measured using the Consumer Price Index (CPI) is expected to reach around 10% this year, a level not seen for decades and one that is far above the target rate of 2%.1 It added that inflation could go even higher later this year, potentially hitting double-digits before it begins to settle down.

Rampant inflation is having an immediate impact on Britain’s small companies because of the increases in the everyday cost of doing business. One such is Fantastic Services, a sustainability-focused provider of cleaning and maintenance services.

“Inflation has had quite an impact on our business,” says Chief Executive Rune Sovndahl. The company has had to switch to different detergents to save costs – but on the plus side, this has allowed it to choose a product that is better for the environment.

Rune explains: “We are now using tablets that dissolve in water when a particular job needs to be completed. This has actually led to using less transportation and water.”

Soaring inflation means that, as a fast-growing business, Fantastic Services must reconsider how it funds its expansion plans. “We do have cash reserves, and we are also looking for different ways to fund our biggest spending,” says Rune. “Our focus at the moment is going green and supplying our teams with electric vehicles. We are still at the very beginning of planning this, and we are already encouraging our franchisees to invest more in them.”

Many businesses will be thinking about what else they can do to deal with rising prices. Many businesses are contemplating – or have already taken – drastic action to mitigate the impact of inflation. According to a survey published in February by the British Chambers of Commerce, 73% of firms say they are increasing prices in response to rising costs.2

The issue of rising energy prices, which has been described as an “existential threat” to small companies by the FSB is another for businesses to contend with. Unlike consumers, businesses do not have a price cap to protect them, and they face spiralling costs in the months ahead.

The average small business spends more than £3,000 a year on energy, according to research by payments provider Tyl, part of NatWest. Some 70% of small-business owners believe that the cost of their energy bill impedes the growth of their business, according to the survey.3

Taking another look at your financial planning at this time can ensure that you’ve reviewed all the options that may help you mitigate rising costs.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.


1 Monetary Policy Summary, Bank of England, March 2022, 17 March 2022
2 3 in 4 Firms Raising Prices as Chancellor warned of ‘Cost of Doing Business Crisis’, British Chambers of Commerce, 10 February 2022, from a survey undertaken between 17 January and 4 February; question answered by 985 businesses
3 Tyl survey of 500 UK SME owners, September 2021

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

Written by
Sharon Bonfield