Q. “I know what 1.5 per cent base rate will do to my mortgage but will it affect my business?"
A. In theory, the reduction in the base rate should lead to an increase in consumer demand as, for example, people’s mortgage costs are reduced so they have more disposable income to spend on goods and services. This, in turn, should feed through to increased demand in the economy as a whole. However, with the constant bad news and daily round of redundancies being announced, consumer confidence is just not there at the moment and consumers are likely to save this extra income rather than rush out and spend it. It seems that, despite the reduction in base rate and other factors such as the reduced rate of VAT, consumers are particularly holding tight on spending where the transactions are high-value (such as cars, furniture and travel) because of this.
The few businesses that seem to be doing well at the moment are those that focus on the ‘no-frills’ market with the perfect example being Sainsbury’s who have increased the proportion of ‘Basic’ product lines available to customers over the last few months as consumers trade-down from premium products to more basic ones. This is an excellent way of retaining customers while helping them to reduce their costs. All entrepreneurs should ask themselves whether or not they are able to do something similar for their customers. Another effect of the rate reduction is that, like in the personal savings market, interest rates on current and deposit accounts are falling dramatically. However, for those businesses that can afford to tie-up some or all of their cash for sux months or more – like one of my clients who last week completed another round of funding to raise £3.75m, only £1m of which they will need in the next 12 months – then a rate of 4 per cent or more can still be achieved, if you move quickly. One final point worth bearing in mind is that the fall in the base rate also means a fall in the rate of interest charged by HM Revenue & Customs on amounts owed to them. This, together with its Business Payments Support Service, which allows you to defer some or all of the payment your tax liabilities, means that HMRC could potentially be a cheap source of borrowing for your business, as the HMRC rate may now be lower than the rate of interest that your bank charges on your overdraft or loan facilities.