As countries all over the world have been battling with inflation, consumers have been faced with high interest rates.
Last week, for the first time in four years, the US announced it would be cutting rates by 0.5% leaving interest rates at around 4.75%-5%.. Whilst many speculated that the UK would follow suit, the Bank of England decided to hold rates at 5%.
This has already had a positive impact on US stocks, as analysts feel more confident about the country’s economic outlook. Businesses around the country are also breathing a sigh of relief, as it shows easier times to come.
Why Are High Interest Rates Bad For Businesses?
High interest rates can affect businesses in a number of ways. Some of these include:
Higher Borrowing Costs
Many companies rely on loans to finance and grow their businesses. When interest rates are high, the cost of borrowing increases, making it more expensive for businesses to take out loans.
This can mean it’s harder to unlock the funds to drive growth, employ more people and buy new equipment. For small businesses and startups, this can be particularly difficult.
Consumer Spending Decreases
The aim of raising interest rates is to stop people spending. This helps curb inflation, but this can be a problem for businesses. Higher interest rates often hit consumers right in their wallets, especially if they have loans on cars, homes or credit cards.
As a result of this, they spend less. For businesses, this can mean lower profits and revenue – especially if they sell consumer goods.
Exchange Rates Become More Expensive
High interest rates can make a country’s currency stronger. This might sound good, but it can hurt businesses that rely on international trade. A stronger currency can make exports more expensive for companies in other countries, potentially reducing demand and impacting global sales.
What Do US Interest Rate Cuts Mean For UK Startups?
Given the close relationship between the UK and the US, it’s no surprise that some business leaders are expecting the interest rate cuts to affect UK companies too. Here, we asked the experts how they think this interest rate cut might affect UK startups.
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David Burrows, Head of Getamover
“The global venture capital scene is sensitive to interest rate changes. With the US cutting rates, we’re likely to see international capital looking for better returns elsewhere.
“This could be a win for UK startups, as more venture capital might head our way. For startup founders, it’s time to get strategic. Try to comprehend that these trends can position your company as a top investment choice.”
Ethan Monkhouse, President & COO at NAVIRO
“The recent U.S. interest rate cuts could offer UK startups with U.S. ties an opportunity to secure capital at a lower cost, especially from venture capital firms or U.S.-based loans. However, this also introduces currency exchange risks, as the pound-dollar dynamic could fluctuate, impacting cash flow and revenue in dollar terms.
“For tech-driven startups focused on scaling globally, the cut may create a more favorable environment for U.S. market expansion, but it’s crucial to account for inflationary pressures and potential shifts in investor sentiment.”
Simon Litt, Finance Expert at the CFO Club
“US interest rate cuts are good news for UK startups. The US economy has a lot of sway globally, and this move signals that they’re looking to stimulate the global economy.
“When interest rates are cut, “safe” investments like government bonds have lower yields, which could signal a return in “hot money” investors seeking higher returns from startup investments.
“Sectors exposed to high debt levels—utilities, property, and small caps—are likely to benefit most from the rate cut, though small businesses in general should be celebrating. The Goliath we call the US Fed is finally looking to stimulate the economy, which will buoy the global economy.”
Ravi Sidhu, Credit Risk at Dun & Bradstreet
“While the Bank of England has held its interest rates at 5%, global economic trends largely led by the US are set to shape the UK lending landscape. As a loosening monetary policy in the US signals increased investment and lower borrowing costs, many American investors will be encouraged to seek higher returns in international markets, driving more interest in the UK overall with the potential trickle down benefit to SME’s and startups.
“This is particularly exciting as our Q3 Global Business Optimism Index shows a 55% increase in investment potential for UK small businesses compared to Q2 this year. However, the bigger challenge lies in accessing affordable credit. Lending to UK SMEs has declined by 4.6% this year, reflecting tighter conditions. If UK interest rates stay high while countries like Germany and France reduce borrowing costs, UK startups could struggle with higher costs of capital, prolonging the current strain on cashflow and stifling growth.
“To navigate the current lending landscape, lenders must harness data and analytics to assess UK SMEs more effectively. By using comprehensive financial information, lenders can make quicker, more informed credit decisions while managing risk. Encouraging SMEs to improve their financial transparency and credit histories will help streamline this process. In an environment of high UK interest rates, mitigating risk is crucial. Lenders that leverage advanced analytics can better identify viable opportunities, support SMEs, and provide the capital necessary for growth while safeguarding against potential defaults.”
Ali Al Bajati, Head of Product and Sam Hall , Senior FX Business Development Manager at Volopa
“In 1972, a Chinese diplomat was asked about the impact of the 1789 French Revolution. He allegedly replied, “It’s too soon to tell.” The same could be said of the recent US interest rate cut.
“For UK startups, the immediate effects look promising. Lower US rates make bonds less attractive and encourage investors to seek riskier ventures, potentially increasing funding for startups. Cheaper borrowing costs could also help accelerate growth, while the US consumer, representing ~30% of global household consumption, may spend more.
“However, challenges lie ahead. The USD has weakened, making revenues from US customers less valuable in GBP terms. At the same time, a stronger pound makes UK exports less competitive. Currency fluctuations could impact startups dealing in foreign markets, so hedging against FX risks is essential as rate cuts continue.
“The bigger concern is why the US made this cut; If inflation is under control, the outlook is positive. But if it’s a reaction to a slowing economy, UK startups exposed to US markets could face weaker demand.
“In short, startups should seize the opportunity but prepare for potential volatility and stay cautious about the long-term economic outlook.”
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