How to cope with the cost-of-doing-business crisis

Higher borrowing costs are curbing investment and leaving some firms in financial distress. What can businesses do to weather the storm?

P.4 Illo Online

The UK’s cost-of-living crisis, thankfully, looks to be easing. But in its place, a worrying ‘cost-of-doing-business’ crisis seems to be accelerating. 

Companies – many with indebtedness arising from the pandemic – are still grappling with high energy and materials costs and consumer demand is flagging. Pouring fuel over the fire are rising borrowing costs, which squeeze margins and place more firms in financial distress. With the era of cheap money over, what can companies do to improve matters?

Driving all of this is the fact that the Bank of England has raised UK interest rates 14 times since December 2021 in a bid to control inflation. Rates are now 5.25%, up from zero a few years back. 

The cost of raising or refinancing loans has shot up and firms that loaded up on debt at rock-bottom rates are facing a “financial reality check”, says Julie Palmer, a managing partner at turnaround specialists Begbies Traynor. 

Consumer-facing sectors such as hospitality, retail and leisure have been hit particularly hard, she says, along with interest rate-sensitive industries such as construction. 

Businesses are facing a chill on investment

The impact is being most widely felt as a ‘chill’ on investment and growth, as borrowing becomes more difficult, says the Federation of Small Businesses (FSB). 

The trade group says would-be borrowers increasingly report being asked for personal guarantees against loans, even for relatively small amounts, which prevents many from going ahead. It also found three in 10 small firms that applied for finance in the third quarter of the year were rejected. 

“Many small businesses are waiting until interest rates start to fall once again before investing in anything that isn’t core to their business. There is likely to be a good reserve of pent-up demand for investment building up,” says policy chair Tina McKenzie. 

More worryingly, the number of firms struggling to repay debts is rising, with insolvencies in England and Wales up by 10% from last year in the three months to September, according to official figures. This year’s total is on track to be the highest since the depths of the financial crisis in 2009. 

We are not at a stage where lenders, creditors and landlords are aggressively chasing firms over late repayments, according to Palmer. But we are seeing underperforming, ‘zombie’ companies hit the wall, and a rise in so-called director fatigue, where owner-managers shut or sell their businesses and rejoin the labour market for an easier life. 

Avoiding a cash-flow crisis

Interest rates are unlikely to hit the 2% target until late 2025, according to the Bank of England, and there’s no sign they’ll fall back to zero. But there are certain basics that firms can do to help ease the situation. 

Palmer says companies should keep a close eye on margins and “not obsess about increasing turnover at all costs”, as tempting as that may be as times get tougher. 

“As the saying goes: turnover is vanity, profit is sanity and cash is king,” she says. 

Firms should look for efficiencies that can be made in their businesses, she adds. Those in cyclical industries, for instance, should review their balance of permanent and temporary staff to check that they aren’t overstaffed. Review energy costs to ensure firms are not overpaying.

It is vital to have a proper understanding of your balance sheets and business costs, so you can see where savings can be made and plan for potential issues, says Owen Bassett, an insolvency and retail expert at insurer Atradius. He says that proactive financial planning can have a huge impact on business viability, including “diversifying your supply chain, insuring trade credit agreements, preservation of cash flow and increasing liquidity.”

Preventing a cash-flow crisis is particularly important. Millions of small businesses still struggle with late payments, for instance – a problem which has worsened as rates have risen. But hiring a credit controller or adopting the right tech can help. The software platform Quadient, for instance, uses automation and predictive analytics to give customers better oversight of late payments. 

“Key performance indicators, such as the percentage of late-payers; unreconciled items; and monthly write-offs give business leaders a better understanding of a company’s financial health,” says Sarah-Jayne Martin, a director at the firm. 

Third parties can help plug gaps in the short term

For those who do find themselves facing a cash-flow shortfall, invoice discounting may help. This is when a specialist firm covers your unpaid invoices upfront, allowing you to plan and invest in staff, materials and equipment while you wait for customers to pay. 

The responsibility for chasing those debts remains with you, but firms can go one step further and try factoring, where a third party takes full responsibility for retrieving the debts owed.

Meanwhile, for those struggling to raise growth capital through traditional channels, alternatives may be available. McKenzie points out that there are many more types of funding out there for businesses than just loans and overdrafts. 

“Asset finance might be a good way for small businesses to get equipment that they need without a big initial outlay, for example, or they could make a pitch to the general public via a crowdfunding site,” she says. 

If a firm gets into real financial difficulties, it should seek help sooner rather than later, says Nicky Fisher, president of R3, a trade group for insolvency practitioners. That might mean calling in a turnaround specialist, as difficult as that may be. 

“Seeking advice early is always the best course of action. It allows you far more options to turn around your business and gives you more time to decide your next steps.”

Despite the gloomy outlook, this period of higher borrowing costs may yield opportunities for some businesses. As weaker firms drop out of the market, stronger and better-capitalised ones should be able to pick up market share. And when rates do eventually come down, well-prepared companies should be in a good position to capitalise on the shift. 

“It can be hard to look to the future in difficult trading times but small businesses need to keep up with developments in their field and be aware of trends or technology that could be useful to them,” says McKenzie.

“Small firms should make plans now. Then when rates do fall, they will be in a position to move swiftly and to grow.”