As a credit manager, how often do you consider the UK’s interest rates – and how a change in the rates could affect your ability to chase overdue payments? Since a change in interest rates could affect whether or not your customers are able to pay their bills, interest rates are a risk factor that may need to be considered when extending credit or chasing up invoices.
So here are two things you need to know about interest rates right now:
- It’s likely that UK interest rates will stay low for the next two years.
- If interest rates did go up, a large number of businesses would no longer be able to pay their bills.
Let’s look at these in a bit more detail:
Interest will probably stay low for the time being
Recent forecasts from economic experts indicate that UK interest rates will probably remain at their current low level for another two years. This is because the economy continues to show signs of slowing and if the outlook gets any worse, there could even be a cut from 0.25 per cent to 0.1 per cent, reports the Telegraph. However, Mark Carney, governor of the Bank of England, has indicated that he wants to raise interest levels before his tenure ends in June 2019. It’s been more than a decade since interest rates have been raised. Earlier this summer, the Bank of England suggested that conditions might be improving, but the latest official data shows otherwise. “Our forecast is for rates to remain unchanged as far as the eye can see, which for us means the end of 2018,” commented Sam Hill, economist at RBC Capital Markets. He added that the Bank of England’s positive outlook earlier this year relied on the idea that other parts of the economy would make up for weakness in consumer spending. It also depends on Brexit negotiations going smoothly.
What happens if interest rates do go up?
Although the likelihood of the interest rate going up is negligible, it’s a risk that credit management teams need to be aware of. Earlier this year, a survey by R3 – an insolvency and restructuring trade body – found that around four per cent of UK businesses (around 79,000 organizations) would be unable to repay their debts if interest rates went up by even a small amount.
Andrew Tate, spokesperson for R3, explained that this was the first increase in the number of businesses worried they would be unable to cope with an interest rate increase since 2014. “It coincides with a period of slower-than-expected growth and a small rise in corporate insolvency numbers,” he added.
R3’s research also found that around five per cent of firms were just paying interest on their debts. Mr Tate notes that only paying the interest is “not necessarily” a signal that a business is in trouble. It could also mean that the company is taking advantage of low rates to invest in operations or assets.
However, he warned that only repaying the interest is also a common characteristic of a “zombie business” – that is, a company that is only able to keep going because of the low cost of borrowing and has little chance of long-term survival. “The research shows that there are tens of thousands of firms currently walking a very tight line,” he added.
What should credit managers do?
Whatever happens with the interest rate in the near future, the best thing for credit managers to do is ensure they are working efficiently and effectively at chasing in payments that are due. Tools like OnGuard credit management software can help to streamline your processes, bring down DSO and reduce the chances of your firm being left with an unpaid bill because a customer is struggling.
To find out more about how OnGuard can improve your credit management function, please contact us today.