“Inflation is bringing us true democracy. For the first time in history, luxuries and necessities are selling at the same price.” (Robert Orben, comedian and writer)

Interest rates and inflation are a nasty partnership that can, if managed badly, derail any small to medium enterprise. Their effects are felt in every area of the business and if they are not addressed correctly, high interest rates can have a significant impact on business, driving up costs, slowing growth and minimising competitive advantage.

Governments use high interest rates to manage the impacts of inflation. When inflation is growing, people should expect interest rates to do the same.  Unfortunately, the global phenomena that have been driving increased inflation over the past few years show no signs of slowing down – the Ukraine war drags on leading to both oil and food supply issues, while supply chain issues and the pandemic’s grasp are both proving more difficult to overcome than expected. This has meant that economists have abandoned any hopes for lower rates in 2024 and have instead coined the mantra, “Higher for longer”.

What does this mean for your business in 2024?

• More difficulty borrowing: Rising interest rates leads to businesses paying more to borrow money and reduces the ability to pay debts that have already been incurred. High debt repayments may make it difficult to finance new expansion projects or invest in new products and services, which in turn can stifle growth.

• Less demand: Customers feel high inflation too. They may turn to buying cheaper products thereby eroding the competitive advantage your company once held, or they may give up on your service altogether. This too can have long-term impacts on growth plans and could severely impact cash flow.

• Declining reserves: Longer high interest rates may mean businesses are required to dip into their cash buffers to service debts or simply to cover costs as earnings slowly dip.

• Improved earnings on cash: Those companies with large cash reserves can see benefits in times of high interest as the return from banks improves.

• Faltering competition: Those companies in good standing may also find their competition struggling. This is the perfect time to seize additional market share.

How to thrive in high interest conditions

• Assess your weaknesses: Evaluate the risks associated with your business operations. Take into account elements like how sensitive your income sources are to economic fluctuations, dependence on particular clients or suppliers, and any external influences that could affect your financial strength. Recognizing potential risks and vulnerabilities empowers you to create tactics that lessen their effects when confronted with an interest rate increase.

• Trim expenses: It’s time to go through your monthly expenses and see where you can save. Are you getting the best deals on rental, internet, and office supplies? If your staff are largely working from home, can you afford to move into a smaller office? Consider outsourcing jobs that aren’t part of your core business – PR, designers, IT professionals and even HR and Admin are good places to start.

• Refinance debt: Take careful note of the debts you have. Is there some way you can refinance them to your benefit? If you are paying off a lot of small, high interest loans such as credit cards, it might be wise to see if you can consolidate them all under one larger, lower-interest debt. Understanding the details of your outstanding debts enables you to assess how an increase in interest rates might affect your monthly payments and overall financial commitments.

• Increase prices: If you have resisted raising prices thus far it might be time to take a look at whether an adjustment is in order. You are likely paying a lot more for your raw materials and supplies than you did a year ago, while delivery costs, advertising and everything else have been climbing as well. If you are managing with the lower prices, then is it possible to turn this to your advantage and aggressively market to snatch a greater portion of the market from competitors who just got a lot more expensive?

• Create a business buffer: Cash flow can be the biggest killer during times of high interest rates. Clients may be struggling to pay off their debts leading to you receiving late payments or even no payments at all if they go under. Consider applying for overdrafts or lines of credit so you are prepared should anything go wrong. If you are able, start building a cash buffer to further protect your company.

• Invest in marketing: Any additional money should go into advertising. The interest rates will eventually start dipping and when they do customers are going to go to the people who are most top of mind. According to a study conducted in 2018 by the Ehrenberg-Bass Institute, brands that halt their advertising efforts for extended periods typically encounter a 16% decline in sales within the initial year and a 25% decrease after two years.

  However, this doesn’t mean simply throwing money away in the hopes of future income. Look at your product offering and focus on advertising those brands and items that might appeal to your clients in times of crisis. Remember, you may need to adjust the channels you market in as your customer’s purchase decisions on their media are likely to be impacted by increased pricing.

• Get expert advice: If you feel uncertain about scrutinising your financial records or evaluating your financial standing, ask your accountants for help. Their specialised knowledge can offer valuable perspectives and counsel customised to address your unique business requirements.