Interest rates increase for the first time in 10 years
We all saw it coming! The base interest rate has risen from 0.25% back to 0.5%, the first increase in 10 years. This rise could cause issues for businesses that have a lot a debt compared to share capital (highly geared) as their loan payments will inevitably increase. And with increased overheads, businesses may struggle.
What if your business is highly geared?
When overheads increase, as a consequence of loan payments, your business needs to make more money. Sounds simple, right? Well, that's the issue. Expanding and keeping a business profitable is one of the biggest challenges a business can face. Your business may need to be more competitive, and to stay competitive you may choose to offer your customers credit terms. By giving your customers the opportunity to make their profit before having to pay you, could draw in more business for you. But with this offering comes added risk!
What if your customers are highly geared?
Your customers would struggle exactly as you would. Higher loan payments could threaten their survival and put a strain on their cash flow which in turn could result in them not paying you the invoices that you offered them on credit. When one customer cannot pay a knock-on effect will occur - and occur quickly, very much like it does when there is a chain for buying houses. We like to call it the domino effect.
What can be done to protect your business?
Credit insurance can reduce the risk of the interest rate increase affecting your business. Whether that's by giving you the confidence to enter new markets or offer credit terms to customers to gain more business, credit insurance can put your mind at rest. Perhaps, your own business is thriving as you manage a tightly run ship. But that might not hold true for all your customers or other customers further down the chain. A well-managed credit insurance policy will stop the dominos falling as a claim will be paid to you even if your customers fail to pay you.
Should you want to find out more information about how credit insurance could help increase your business's profits and reduce the risk of a bad debt destabilising your company, please do not hesitate to get in touch.