Higher Interest Rates - How Might You Respond?
With increasing interest rates, we need to get used to a new environment where debt has a more noticeable cost and cash has a meaningful value. It's likely to be worth paying attention to this area more than you have done for many years. Here are eight main things you might want to take a look at:
If you have excess cash, you're creating a new profit centre!
1. Move excess cash into the increasing number of company savings accounts
There's no need to just look at your usual bank of course. You're more likely to get a decent credit interest rate elsewhere even when maintaining instant access in case you have a business need. Corporate savings accounts that we've come across include Aldermore, Nationwide and Virgin.
2. Pay HMRC early
Along similar lines, get your spare working capital working for you and receive interest from HMRC. After today, HMRC's credit rate should increase to 2% (being 1% below base).
3. Negotiate reductions with suppliers for paying early
If your suppliers would appreciate earlier cash, get something in return for early or prompt payment. This is often going to be a price reduction, but might also be a spec change or preference eg agreeing to deliver to more than one address, or adding a feature you've needed for a while but the gross margin didn't work.
You might instead choose to invest surplus cash in your business for future growth and resilience which could provide greater long term value for your business.
If, your cash is tight, you'll need to work at finding the most appropriate, good value sources of finance and working capital:
4. Review bank borrowings
Are you paying high interest rates on overdrafts or unsecured finance? Might you get a better rate using security such as your debtors or other assets? If you need more finance, do it in a planned way getting the cash you need at the best price you can. You may have excess cash at certain times during the year, so ensure this works for you to help fund borrowing costs at other times of the year.
5. Negotiate with customers for early payment and suppliers for late payment
If you have a decent gross margin, you may be prepared to give some of your margin away for prompt or early payment. At the other end, your suppliers may be happy with delayed payment for simple interest, a higher price or agreeing to consider them for your next contract.
6. Lease new plant and equipment, sell owned assets
If you'd planned expanding with new equipment or need replacement equipment, consider leasing or hire purchase. The total costs will be higher and need to be factored into the increased profits your investment is expected to generate. Build in the different tax treatments into your cashflow calculations. With hire purchase you still get to claim the 130% super deduction, where applicable.
Consider selling any owned assets, perhaps surplus freehold property space, if it helps keep your business on track.
7. Borrow from yourself
If you have personal cash to lend to the company, your company can refund you in the future tax free and in the meantime pay you interest. This saves the company corporation tax and some of it might be tax free for you.
If you don't have cash but can borrow at a better interest rate than your company, you could on-lend to your company. The interest you pay on this personal loan is tax deductible against the interest you receive from your company.
8. Attract new investors
At the more structural end, with an expansion plan you could attract third party investors getting a cash injection in return for shares. The SEIS and EIS tax efficient schemes encourage investors to take more risks in smaller companies.
If you didn't have it before, you now have a new 'treasury' function within your business which needs optimising to help your business survive.