The foundation of a healthy economy relies on the ‘impossible trinity’ which is made up of three core components - interest rates, inflation, and exchange rates. The first two are self-controlled and constantly regulated in the UK to aid competition and subsequently, the cost of living (and working). Interest rates are intertwined with inflation, as when inflation increases, interest rates will mirror this to keep prices down.
As inflation in the UK hits a 40-year high, interest rates have also risen which means that construction companies will need to tolerate a higher cost of operating. Keith Tully of Real Business Rescue explains how high interest rates are affecting small construction companies on a day-to-day basis.
Cost of operating a construction business in 2022
Operating a construction business while interest rates are high will require a rewrite of the rules for borrowing, repaying, budgeting, and forecasting growth.
Borrowing
When interest rates increase, borrowing money costs more and when interest rates gradually drop, the price of borrowing will follow suit by decreasing. So, if your construction company is fuelled by borrowing, such as a loan, it may end up costing more to run the business following the hike in interest rates. If you’re well within a loan agreement, your pocket may only feel the height of the interest rate increase when renewing the loan or seeking out a new loan.
Repaying
If you’re a sole trader, high interest rates could hit you from both angles; business, and personal as there’s no legal separation between both entities. If you’re off track with personal repayments as high interest rates are biting into cash flow, the effects of this will likely rebound onto your business, hampering your ability to buy supplies and financially commit to projects.
Price of materials
Suppliers may respond to high interest rates by raising the price of materials and supplies to cushion themselves against the increased costs of operating a business. Although a price hike may deter customers, this move may be necessary to maintain profitability. Without increasing prices, company overheads can quickly snowball, neglecting other areas of the business that will require a top-up, like trade credit accounts, staff wages or pensions.
Decline in new projects
As interest rates increase, funds originally earmarked for projects may now be insufficient as supplies cost more than they initially did. While higher interest rates will mean an increase in overheads, the number of new projects may likely slowly decline, including the downscaling of existing projects yet to undergo construction.
Support for small construction businesses
To protect the financial health of your business and reduce the risk of insolvency, advice for construction companies may take the form of restructuring finances to streamline outgoings or negotiating payments with creditors to secure more time to pay. By recognising the early signs of financial distress, construction companies can act in the best interests of creditors and live to see interest rates return to a steady level.
FMB members can also access free financial advice via the FMB's business advisory helplines.
*Disclaimer: This blog post is guest content, which is independent of the FMB. Publication does not constitute endorsement or recommendation from the FMB.
