The Interest Rate Rollercoaster: How to Prepare for the Ups and Downs

Interest rates and high inflation have been regulars on the newsfeeds for far too long now. The latest headline inflation result arrived at 6.8% for July, a significant improvement from June’s 7.9% result, but the decrease is mainly due to energy price falls. 

Core inflation isn’t impacted by volatile food and energy prices and remains sticky. In short, there’s a long way to go before we’re in a healthier inflationary environment - which means higher interest rates could stick around for years to come.

That news might be a disaster for the small businesses, freelancers and individuals who thought the worst was over. We’re diving into how high interest rates impact these three groups and what you can do to protect your position against high inflation.

How do high interest rates affect business owners?

In a high inflationary environment, the central banks’ one weapon is raising interest rates to limit spending. That means increased cost of borrowing for businesses and higher repayments on any loans you might be considering taking out. This, in turn, can lead to cash flow issues, especially for small businesses that might not have large cash reserves.

Higher interest rates can also affect the valuation of a business. The increased cost of capital makes investments less attractive, potentially lowering the market value of the business.

All hope isn’t lost. As a business owner, there are some steps to take to battle high inflation. These include:

• Considering taking out a planned loan now to secure a lower interest rate before rates climb higher

• Choosing a fixed-rate loan, which provides predictability in repayments

• Building a healthy cash reserve where possible (easier said than done, we know!) to cushion against financial blowbacks

• Reviewing and optimising operational costs to help free up cash to pay down debts

A qualified financial adviser or tax professional can provide you with tailored strategies for navigating a high-interest environment, so reach out for help if you’re feeling overwhelmed.

The impact on solopreneurs and freelancers

A sole trader or freelancer might have even less financial cushion than a company. Higher interest rates make loans and credit cards more expensive for this type of business. Also, everyday operational costs like subscriptions or materials could get more expensive as other businesses pass inflationary costs on to their customers.

Perhaps the biggest issue is freelancers running out of work as their clients slash budgets to cope with the financial landscape. Sole traders and freelancers might charge less for work than before or have fewer clients to work with.

Thankfully, there are ways to mitigate the challenges you might face with managing cash flow. Here are some options:

• Hire a tax professional to help ensure you’re not overpaying or underpaying tax, as well as taking advantage of any tax reliefs or allowance you might not have known about

• Build an emergency fund to account for unexpected, including higher interest payments

• A well-thought-out budget can help solopreneurs anticipate and prepare for higher interest costs

• Understanding the basics of interest rates and their impact can empower freelancers and sole traders to make informed decisions. Online courses, webinars, and consulting with financial advisors can be valuable resources

How do high interest rates affect individuals’ tax positions?

It’s not just the business side of things that inflation takes a bite from - individuals can feel the heat with their personal finances. High inflation usually means stocks go down as businesses feel the pinch (though, admittedly, that hasn’t been the case in 2023).

Property, in particular, gets expensive when high interest rates persist. They have a knock-on effect on mortgage rates, forcing many landlords to reconsider their position in the buy-to-let market as interest repayments have spiralled.

• Diversifying your portfolio with different assets, like bonds, could help weather the financial storm

• Consult a tax expert to optimise your investing strategy in the new interest rate landscape

• Review any property investments and work out if it’s still financially viable to hold them - don’t forget about capital gains tax if you’re selling multiple properties

• If you have a significant portion of your income from fixed sources like pensions or annuities, see if they come with cost-of-living adjustments to help keep pace with inflation

Help is at hand

We won’t lie - it’s a tricky economic reality we face now. However, strategic planning and informed decision-making can navigate these turbulent waters. The key is being proactive and aware of your financial situation at all times so you can mitigate risks as soon as possible.

Need some help with knowing where to start? BXD Accounting has a wealth of expertise ready to help you fight back against inflation. Book an initial free consultation with us today to find out how we can help.