The Bank of England has finally announced a 0.25% cut in interest base rates this month. The cut is the first in 7 years, taking the base rate to a historically low level.
The Bank of England has taken this decision as a result of concerns that the UK’s economy has stopped growing following the Brexit result in June. The uncertainty resulting from Brexit is thought to have caused an increase in unemployment since June, a slow down in the housing market and a decline in business confidence. All of these are bad indicators for the health of the UK economy.
Why has the Bank of England cut the base rate? It hopes the cut will boost the economy by making it cheaper for business and for individuals to borrow money. The Bank of England has urged banks to pass on the cuts to their customers. It is hoped that we will be encouraged to spend our money which in turn increases demand for goods and services leading to growth in the economy. In other words, money makes money.
The Bank of England has also announced additional measures for business including investing £100bn into the banking system to encourage business to borrow more at lower rates.
It remains to be seen how this will trickle down in practice and how business will feel the effects of the measures.
The wider message to be taken from the Bank of England’s base rate cut and the quantitative easing measures is the concern that growth in the UK economy might fall. This should prompt businesses to consider their own financial positions and consider these, against the wider economic picture, in conjunction with their own business plans.
It may be sensible to keep a closer eye on your businesses’ own credit control measures and re-evaluate your business practices for taking on new business. More thorough credit checks might be appropriate particularly if you are operating in risky industries which are susceptible to knocks in business confidence or if you are operating on large credit terms with your customers. We can provide you with advise about credit control and debt recovery.
On a positive note, the announcement may be a time for your business to explore opportunities for growth if there is an increase in bank lending on more favourable terms. We will update you with any information we hear about from the local bank branches in the areas to see if they have been given scope to increase lending to business at cheaper rates.
We would recommend that any significant business decisions are properly and carefully considered in conjunction with professional advisors including your accountants. Borrowing more money is not without risk, especially if you are asked to provide personal guarantees to repay the borrowing in the event that your business cannot later repay the borrowed money. You may also be asked to provide security over land and buildings which your business owns or even over the directors own homes. You should always take legal advice before agreeing to provide banks with personal guarantees or security for business lending.
For further information regarding these issues, please contact Susan Lewis at Jordans Solicitors.