The effects of interest rates on consumer lending

For a second time in a decade, the Bank of England (BoE) has raised interest rates by a quarter of percentage point, from 0.5% to 0.75% in Q3 of 2018. This rise would put the current interest rate at the highest level since March 2009 but Mark Carney, the governor of the BoE said there could be further gradual rate rises.

Interest rate is basically an amount charged by a lender to a borrower for the use of an asset. In this case, the asset in question is cash. How this translates to an average person is to firstly understand the relationship between interest rates, inflation and lending. As interest rate increases, the cost to borrow subsequently increases. For the average SME operator, their cost of borrowing from the banks in the form of loans are now increased, thereby increasing their cost of capital. As Ray Dalio famously explained, an individual’s spending is another person’s income. Since an SME operator now faces more expensive borrowing, his spending would likely have declined as well. On a large scale, less spending would mean people’s incomes drop and inflation then following suit.

While a decline in inflation translates to slower growth in prices for goods and services, the same can be said for assets. As inflation slows, assets generally grow at a slower pace as well. Since the cost of debt now is more expensive from the increase in interest rates, lenders are generally not as inclined to lend. This is because lenders are generally more cautious and not as confident that the assets could produce the income needed to cover the interest rates in times of low inflation.

Due to historically low lending rates, consumer debts have reached peaked. In fact, consumer credit has grown by 7% (2017: £270.1bn, 2018: £290bn), mortgages or housing by 1.9% (2017: £1,162.8bn, 2018: £1,186bn) and consumer lending by 3% (2017: 1,432.9bn, 2018: £1,476bn). It is estimated that if interest rates continue rising, more households will default on their debt repayments, making lenders even more wary of lending.

Effective funding solutions for businesses

However, borrowing from banks is not the only way to keep the cash flow woes at bay. At Populous World, we offer flexible invoice discounting services to help you manage your cash flow better.

Invoice finance has historically been perceived as traditional and has been avoided due to its high fees. Fast forward to today’s world of business finance, with a number of new providers, and new models in the market, it is no longer a business funding solution of last resort. In fact for many small firms, it has provided a financial lifeline.
Kevin Ashby, Non-Executive Chairman of Populous World, said: “the current invoice finance model is very inefficient in the way that providers attract and on-board clients and the way they use traditional risk management techniques to access and manage the relationship. Highly inefficient processes lead to high costs, which in turn make the service unattractive; especially to smaller companies, many of which only require occasional support. Populous World is well positioned to break down the barriers and allow more companies to participate in this market place – raising finance from their outstanding invoices, but on a selective basis”.

It is anticipated that SMEs can experience a lack of growth especially businesses that are capital intensive and don’t have the cash flow flexibility to support their demand for orders or services. Another contributing factor could also be due to the unexpected levels of growth, it is difficult for business owners to plan exactly what is required in terms of funding, especially when demand dramatically exceeds original forecasts. In order to avoid disruptions in operations, Populous World advises businesses to adopt effective cash flow management in the form of invoice financing and financially propel to a position where they can focus on expansion, innovation or hiring the required skilled workers needed, without having to worry about cash flow shortfalls.

Populous World’s business development team specialise in helping businesses to bridge cash flow shortfalls and offer guidance on how to grow and sustain effectively.
To speak to a member of our team and discuss your bespoke funding requirements, contact: [email protected]

Jason Tuang & Lou Chan
Populous World