The UK’s economic recovery has got the vast majority of businesses concerned about inflation for the first time in at least a decade. The current CPI is set at 6.1% as of February 2022 but is expected to rise to 8% by the end of spring, leading to many businesses needing to reconsider their cash flow forecasts. With the increased pressure of rising costs resulting in increased prices, what can businesses be doing to regain an added sense of security for their business through these unprecedented times?
1. Refinance and renegotiate
A good starting point is to address your current state of finance. This includes assessing the current rates of any finance your business or commercial property has and understanding whether refinancing could be an option. For example, if you were to refinance your commercial property from a variable rate to a fixed-rate, you’d get the reassurance that your repayments would not be affected by economic changes such as the ever-rising inflation the UK is currently experiencing.
The best course of action to take when considering refinancing is to speak to a broker. Of course, it’s possible for you to open talks with your current lender to discuss what else they may have for you, but this significantly limits your options as there could be much more favourable rates available to you from alternative lenders than a broker could introduce you to.
Typical current rates range from 4-20%, with places such as Shawbrook Bank offering rates as low as 3.69%, but it’s important to remember that rates vary widely depending on your business’ age, credit history, individual lender as well as the economy.
Generally speaking, in comparison to variable rates, fixed rate loans are often set at a slightly higher rate as they do not fluctuate in line with inflation. Whilst this may not always be the most beneficial, when protecting your business against inflation, it is worth settling on a payment that you know will not be subject to increases in the future.
Fixed-rate loans are generally the most suitable option for businesses looking to combat inflation, but it is by no means a one size fits all, which is why a broker plays such a vital role in ensuring businesses find the right deal.
2. Consider alternative loans
When businesses are faced with issues like rising inflation, a cash injection can always be useful to help tackle increasing overheads and buy you some extra time to make reductions and thus, get your head above water.
There are financing options that many businesses are unfamiliar with which could provide a solution to their problems. One of these options is a VAT loan. Particularly in the context of tax liabilities increasing from April, cash flow management is a huge problem for businesses right now. Receiving help for these specific payments could really alleviate the stress of the larger payments that are expected to be paid in one go.
A VAT loan allows businesses to spread their bill into manageable instalments to a lender who pays the fees directly to HMRC. This stops businesses from having to part ways with a large part of their reserves at an uncertain time and instead turns a large payment into something more conceivable. Being able to spread your payments out across the year allows your business to stabilise its cash flow and focus on growth as opposed to dipping into savings to cover unexpected costs.
3. Asset finance options
Businesses require equipment in some capacity to function, whether that may be office furniture and equipment or larger plant machinery.
With increased costs as well as overheads, these necessary purchases may be out of reach for some businesses during the current climate. But there are options.
Asset finance is a great way for businesses to access funds for their necessary equipment without overstretching. This kind of finance provides businesses with a loan specifically with the purpose to purchase assets that help to advance businesses.
There are three main kinds of asset financing, the first being hire purchase, which is a contractual loan that offers immediate access to the asset which you will own outright after the payment completion which is most often spread between one and six years.
Equipment leasing is an alternative option that enables businesses to rent any required assets to the lender who will purchase your needed assets themselves and lease them out to you on an ongoing basis. This allows businesses to have access to their equipment without having to take out a loan or use their own capital.
Another option for asset financing is asset refinancing, which is for businesses who have previously invested in their equipment, but now need to release capital from their assets into their business. To make this possible, lenders will buy the assets from the business and lease them back to you, meaning your business receives a cash injection, and you can still keep the use of your equipment.
The benefit of asset finance in terms of rising inflation is that not only is it a more flexible option to taking out a bank loan but generally are also fixed-rate payments, making it a more secure consideration during the time of rising costs. Furthermore, it allows businesses to continue with growth and expanding services whilst navigating and controlling a turbulent market and economy.
The Super Deduction is also worth considering for businesses on the topic of asset finance. From April 1st, 2021, to March 31st, 2023, businesses investing in qualifying machinery and equipment assets can benefit from a 130% first-year capital allowance. The super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they spend on equipment investment.
The list of qualifying equipment and machinery is extensive, but purchases that do not qualify may still attract a 50% tax relief, which is still a huge benefit for many businesses at this time.
It’s important to note that hire purchase bought assets can still qualify for the super deduction as long as it is outlined. However, finance leases have special rules applied as to whether the super deduction is still a possibility. This is why it is always worth consulting both a broker to get finance specific advice, as well as an accountant who can advise on the taxation implications of your business.
A word of caution
These are just three options that businesses can consider to help them deal with rising inflation, as well as ongoing supply chain issues, and recruitment concerns. However, it is important for businesses to ensure they are mindful of additional borrowing.
The information in this article does not constitute financial advice and is for educational and entertainment purposes only.