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Unravelling the Impact of UK interest rates on your business


On the 1st of February 2024, the Bank of England announced that interest rates would be held at 5.25% for the fourth time in a row as they strive to achieve the Government’s inflation target of 2%. In December 2023, inflation was double this target at 4% which led the Bank of England to take the view that interest rates, for the time being, should not be cut.

Whilst these measures are intended to stabilise the UK economy, they have profound implications for businesses. This article delves into the repercussions of high inflation and interest rates on businesses and explores how they influence the dynamic of deal-making.

Interest Rates and Borrowing

One of the primary channels through which interest rates affect businesses is borrowing. A vital resource of funding and expansion, when interest rates are held at a certain level, businesses face a consistent cost of capital. This stability can be beneficial for companies planning longer term investments as it provides a degree of predictability amidst an uncertain and volatile economic landscape. However, for businesses heavily reliant on debt financing, higher interest rates can lead to increased borrowing costs which potentially impact profitability.

Investment and Expansion

The Bank of England’s decision to hold interest rates can influence the investment and expansion strategies of businesses. Low interest rates may incentivise companies to borrow money for strategic investments, such as expanding operations, upgrading technology, or entering new markets. On the other hand, higher interest rates make financing more expensive and may prompt business owners to adopt a cautious approach in their spending, which can have a cascading effect on deal activity.

Inflation and Business Deals

Inflation is another critical factor that can shape the business landscape. While moderate inflation is generally considered healthy for economic growth, excessively high inflation has eroded the buying power of businesses and disrupted business operations. Higher inflation has seen the cost of financing soar over the last 12 months with many business owners cautiously consolidating their market position amidst economic uncertainty, as well as prompting them to seek alternative investment through asset-based lending or challenger banks, to deal with the increased cost of lending to finance deal making.

High inflation has also affected the dynamics of buying businesses with a resurgence in due diligence to provide assurance to business owners of any risks or liabilities in investing, with earn-out provisions becoming increasingly popular to ensure that there is a degree of expertise that remains within the business to navigate it through the immediately uncertain future post-acquisition.

Challenges and Opportunities for Businesses

While the impact of the Bank’s decision may pose challenges for many business owners, it also creates opportunities. Businesses with a strong balance sheet may find favourable conditions for strategic acquisitions and take advantage of the certainty of fixed rate financing to provide a degree of certainty for the short term.

In conclusion, the intricacy between interest rates and inflation highlights the delicate balancing act of politicians in the aim to drive down inflation without sacrificing innovation and economic growth. Whilst the intention is to foster a stable economic environment, businesses and business owners must navigate the challenges and opportunities that arise from the uncertainty of the macroeconomic climate. This means businesses must be flexible and adapt quickly to changing circumstances as the economic landscape continues to evolve.

Need help to make your business resilient?

Let’s talk! Glenville Walker is a team of solutions-driven lawyers here to help. We offer clear, tailored advice and support to help your business grow.

Contact us on 0151 305 9650 or email for further information.

This article is not intended to be interpreted as advice.

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