Back in June, the Bank of England increased its base rate to 5%, up from 4.5%, marking the 13th consecutive rise since December 2021. The aim is to ease inflation by slowing economic activity. High interest rates are meant to deter people from borrowing and spending and encourage them to save.
However, inflation stands at over 7.9% and isn’t declining as quickly as first hoped. Running a business always comes with challenges, but it’s certainly been a tough ol’ time of late. What impact are higher interest rates having on trade, and what can you do to try and soften the blow?
Fewer projects come your way
Rising energy bills, cost of food, and mortgage rates has everyone watching their wallet even more closely. This could mean cutting any non-essential spending and holding off on any home improvement projects. People are also more reluctant to spend on credit, as they try to manage their debts during this difficult time. But the knock-on effect could mean less work coming your way, affecting your top line.
While you can’t do much to tackle the cost-of-living crisis, it’s important to remember what you are control of – your business and relationship with customers. Customer service goes a long way, especially during times like these, and people will remember whether they had a good – or bad – experience!
Good customer service makes you stand out from competitors and helps extend your advertising reach. When you treat your customers well, you’re more likely to be their first port of call when they need your services, or when recommending a tradesperson to friends, families, and colleagues.
Good customer service can also boost your sales: Salecycle estimates the likelihood of selling to an existing customer is between 60-70%, while a new customer varies between 5-20%. Plus, existing customers are likely to spend 30% more than new ones.
For more easy-to-implement tips on how to improve your customer service, read our advice here.
Difficulty borrowing and repaying
Another effect of the rising BoE base rate is when it comes to taking out a loan and making repayments. Your experience might be different to before. It could be altogether more difficult to secure funding, if you need the extra cash to buy supplies or pay off other debts. If you are able to get a business loan, it could come with higher borrowing costs.
Businesses with company credit cards and existing loans can face higher interest payments, resulting in less disposable income and bigger overheads. You may even find you’re only paying off the interest, rather than the loan itself.
Monitor your finances closely and revisit your business plan if you have one. Evaluate any current debts, especially if they have variable interest rates, and your cash flow. If you do need to borrow, you don’t want to risk overextending yourself and what you can afford on a month-to-month basis.
If you’re having cash flow issues, consider changing your payment arrangement so that you get paid in stages, rather than one lump sum. Many tradespeople work on credit, but this can leave you exposed to late payments, or customers failing to pay. Our blog here explains how to set up a payment system that makes you less reliant on large outstanding payments.
Supply chain disruptions
Brexit, Covid-19, increased fuel costs, and now the cost-of-living have all played a major role in supply chain chaos of recent years, and you will likely have felt the effect by having to wait longer for materials or pay a higher rate for them. Although a high interest rate can help control inflation, it can also make supply chain issues worse.
To help manage this potential disruption, it’s important to manage your current and upcoming work sensibly. Assess whether you have enough resources on-hand already, or factor in supply chain difficulties when taking on new projects, to keep on top of your own pipeline and profit margins. Can you afford the extra high prices, or having to wait longer for supplies?
Take a look at your usual suppliers, and how well they’re doing in the current circumstances. You may be able to find better rates elsewhere, so diversifying your own supply chain could provide added insulation against these disruptions.
It’s also crucial to manage customer expectations, especially when giving clients quotes on the time and cost of a project. Many will be aware of the supply chain issues from recent headlines, but you can build trust by setting out accurate estimates from the get-go. Don’t try to over-promise on what you can deliver to secure the work. A good relationship with open communication will see customers coming back time after time.
Rising cost of materials and tools
It’s not just the weekly food shop that’s risen steeply in cost. Construction materials and tools have also become more expensive. The latest statistics revealed by the Department for Business and Trade show the price of screws are up 33%, ready-mixed concrete costs have risen by 19% and insulating materials are 29% more expensive.
Across all trades, workers spend an average of £1,110 on tools each year. But, compared to before the cost-of-living crisis, 5% of tradespeople are keeping their tools for longer than they used to, and 16% are more likely to repair their own equipment. Alarmingly, 13% are using damaged tools, because they can’t afford replacements.
With supplies at a higher cost, you’re left with a dilemma: having to absorb these higher prices or pass on the cost to your customers.
As with anything that increases in value, you need to make sure you’re correctly covered. Your tools and stock are valuable assets – and it can be a huge challenge to fix stock contract prices at an affordable rate, and to purchase new tools in the current climate. But ask yourself if your materials or equipment were stolen, or destroyed in a flood or fire, could you afford the increased cost of replacing them?
Remember, you can review your contracts mid-term, not just when it comes to renewal. Take plenty of time to look through your documents now, to see what cover you have and work with a specialist advisor to keep you covered during inflation.
With prices increasing, it is worth contacting your insurer or broker to ensure you have the correct protection in place. Our specialist commercial team is always happy to answer any questions you may have. Find your nearest branch and talk with one of our expert advisors.
Sources: Natwest, Salecycle, Project Scot, Federation of Master Builders, GoBridget