Ok, we know that this isn’t the most interesting of subjects, and there isn’t much in the way of good news to share, but it is really important, so please take 2 minutes to scan these notes. We will get to the key points really quickly…
Interest rates have gone up fast and quite far (compared to what we have all become used to). Let’s not point fingers of blame (Ok let’s – Putin, Liz Truss, Kwasi Kwarteng), but this is a combination of highly unusual factors (worldwide supply chain issues off the back of a pandemic, and on top of a war and some appalling fiscal planning!).
They may yet go up further in the first half of 2023, but all the indicators are that they will drop down again after that. Lowering interest rates is always slower than raising them, and most people think we are unlikely to see the Bank of England Base rate below 2% for a very long time.
So anyone that borrows money, whether personally for mortgages or loans, or as a business through overdrafts, mortgages, invoice discounting or any other form of lending, has seen borrowing costs go up substantially. Whilst rates are still actually quite low, if you were borrowing at 2% and now it is 6%, then the cost each month has trebled!
More importantly, the market providing these sources of funding has changed almost beyond recognition. Thousands of lending products have been withdrawn from the market (high loan to value mortgages, some interest only deals etc) and some lenders have simply stepped out of some sectors of lending altogether (buy to let funding, hospitality sector etc). Strangely, there is still plenty of money in the system to lend, it is simply that many lenders are far more cautious than they were even 6 months ago.
The final twist to the story is that the lending process is in crisis. Lenders are taking many weeks to confirm a lending offer, Valuers are taking longer to do the valuations, more questions are being asked and many lenders lack the resources to handle applications. One of the sticking points is that some lenders now use a sophisticated tool to interrogate your bank transactions over the last few years. This flags obvious stuff like bounced payments, unauthorised overdrafts etc, but also types of spending lenders don’t like, such as online gambling etc. It isn’t every lender yet, but the day is coming where the way you conduct your finances, and what you spend your money on, will have as much an impact as the amount you earn or the value of your assets. So almost every deal is taking longer to sort and some deals fall over because of those delays.
In short…
So what should you do?
Be ahead of the game. When trying to borrow money, or just refinance existing debt, the delay could mean you go beyond current lending terms. Start looking at options 3 to 6 months before you need to and give yourself plenty of time.
Understand the new cost of money. Offering customers 60 or 90 days credit in the past may have been ok, as the cost of funding it was cheap. New interest rates will be eating into you profit margins if customers still take extended credit. For landlords, new refinance rates might mean that rents no longer cover interest and other costs. If you use credit card services, there is still a competitive market for reducing costs and fees, if you know the options. So on borrowing and transaction costs, work out your numbers and make informed decisions.
Know what your options are. It was not that long ago when you could simply have done a google search to find funding options (or read one of the many unsolicited e-mails offering it). Knowing who is willing to lend and on what terms on what projects/sectors/businesses is a daily moving target. The best way to do this is to have an expert assessment of your situation.
The reality for us as Accountants is that we simply cannot keep pace with the speed of changes in the lending market place. So we recommend that you use a funding broker to do a ‘health check’ of your situation and get a clear picture of your funding options. We have often worked with Dave Ottley of Balance for Business, who has helped many of our clients arrange all types of finance, from a wide range of lenders. Even if the conclusion is that you don’t have any good options, he can provide invaluable advice on how to handle your existing lenders if things get a little difficult.
You can contact Dave on 01752 227 966 or email Dave@balanceforbusiness.co.uk