Although the UK Government has announced a package to help small businesses and households with energy bills, the fallout from the so-called mini-budget could create challenges for small businesses.
Small businesses will have breathed a sigh of relief after Liz Truss announced that households as well as businesses will get support with their energy bills this winter.
And when, on 23 September, the Chancellor revealed the fiscal event – or mini-budget – many business owners and commentators were surprised at its scope and the wide-reaching tax cuts contained it in.
Since then, the pound has plummeted, signalling that the markets have lost confidence in the UK economy. The Bank of England (BoE) made the unprecedented move to spend £65 million buying UK government bonds in a bid to prevent pension funds from collapsing.
This intervention was a direct response to the fallout of the mini-budget and the resulting economic crisis. And this economic crisis will pose challenges for small businesses.
Rising Interest Rates Not Just Bad For Households
It is widely expected that the Bank of England will continue to increase the base rate to get inflation under control. It currently stands at 2.25%, after the latest rise on 22 September.
But experts have forecasted that it will rise over 4% by the end of the year and could go as high as 5.5% by July 2023.
This can create a headache for many small businesses, because it means that it will cost more to pay back any debts they have, including any Covid support loans or commercial mortgages.
At the same time, many small firms are struggling in the face of rising operational costs, lower customer demand and rising energy prices. To stay afloat, many are lending money to cope with these rising costs.
With about 50% of small businesses with a loan being on a variable rate, their repayments will rise whenever the BoE raises the base rate. So it will become more of a challenge to afford the monthly repayments. And the loans will also end up costing more.
And even for businesses on a fixed rate, the interest rate rises could mean bad news. If the fixed rates run out, businesses will either move to the variable rate or try to get a new fixed rate. Either way, it is likely that their payments will go up, which will spell disaster for many small businesses.
A big part of SME lending is affordability and they are already under a mountain of debt. As that debt matures and needs refinancing, it will become more expensive and harder for them to service. The banks will not offer them the same level of debt. I expect this will lead to a larger number of insolvencies in the next 18 months.Andy Holgate, Lending Specialist for SMEs
Weak Pound Pushes Up Import Costs
The first and most immediate reaction to the announcement of the mini-budget on Friday was a sharp drop of the pound against the dollar on Monday. It reached a record low and while it has recovered slightly, it is still on a low value.
This means that small businesses who buy goods or material from outside the UK will have to pay more for it.
If the value of the pound falls further, the challenges for businesses will only get bigger. Which might mean small businesses will have to increase their prices to meet the rising costs of running a business.
But this could mean that they lose customers. Especially, because household finances continue to be under pressure. Rising interest rates push up mortgage rates, which means many will face a big increase in their monthly mortgage payments.
And while the energy bill support package will prevent domestic energy bills from rising to unsustainable levels, costs for energy have risen again in October. High inflation keeps cost-of-living at elevated levels, putting pressure on household budgets.
So any small business being forced to raise prices will be concerned about the impact this will have on their income.
Growth Plan To Boost UK Economy
However, some measures announced in the fiscal event last week, will be good news for small businesses. The Chancellor announced that he plans to simplify the tax system for businesses, which will be a welcome move, given the complexity of the current system.
At the same time he also revealed that he plans to reverse the IR35 laws, which regulate off-payroll working. This could make it easier for companies to hire contractors and experts when they need them for as long as they need them.
However, no details have so far been given on how things will change, which has many experts concerned. Lack of clarity is always worrying for businesses, so it will have to be seen how the proposed simplifications will work.
Another positive announcement was the plan not to raise corporation tax. Former Chancellor Rishi Sunak planned to increase corporation tax to 25% of profits over £250.000. Firms with profits between £50.000 and £250.000 would have faced incremental increases between 19% and 25% depending on how much profit they made.
Small businesses with profits below £50.000 would continue to pay 19%, which covers about 70% of all UK businesses, according to the Government website. However, this tax increase has been dropped now.
So while small businesses are facing many challenges in coming months, some measures announced in the mini-budget might ease the pain.