Interest rates at 14-year high and UK faces two year recession: The small business reaction

The Bank of England has increased interest rates to 3%, the highest level since 2008, and warned that the UK is in recession with the downturn set to be the longest since records began in the 1920s.

The 0.75 percentage point hike is the biggest single rise in rates for 33 years. The Bank said the recession could last for two years which would be the most protracted economic decline since the Great Depression.

Interest rates have been increased in an attempt to tackle soaring inflation. The Bank believes that by raising the cost of borrowing, people will spend less and cut the pressure on prices. It says it expects inflation to "fall sharply from the middle of next year".

The decisions by the Bank of England will have an impact on small businesses.

Emma Jones, founder of Enterprise Nation, said:

"It's bleak, but predictable that interest rates are on such a steep incline. Our latest Barometer shows that small businesses are already reigning in their growth expectations while trying to keep up with seasonal demands by working longer hours and taking less breaks.

"The small business community tells us they now see the current economic climate as an equal challenge to that posed by the pandemic for the first time.

"They will need a rock-solid environment to restore confidence and all the support they can get to navigate the challenges of the next months in order to come out the other end into recovery."

Despite the prediction of tax rises being included in the speech, businesses will now look to see whether the government unveils any new support in the Autumn Statement on 17 November.

We're running live coverage of the Autumn Statement from 10.30am on 17 November, with an online panel of business owners and experts sharing instant reaction. Head to this page to follow the reaction and share your views.

Responding to the interest rate rise, chancellor Jeremy Hunt said:

"Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country. That is why this government's number one priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.

"Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin's invasion of Ukraine.

"The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.

"Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth. However, there are no easy options and we will need to take difficult decisions on tax and spending to get there."

The impact of the recession on small businesses and what they are doing to cope

Small business owners explain how the economic downturn is affecting them, their reaction to the Bank of England's decision and what they are doing to deal with the impact.

Jo Blood, Enterprise Nation member and director of Posture People:

"We're finding people are more hesitant about spending money, and the interest rate rise is probably going to increase that situation. People will have less disposable income if things such as their mortgage costs increase, but what really seems to affect it is ‘the thought of a recession’. People are just being more careful and they think twice about purchasing items.

"We sell mainly to businesses, so we are not as reliant on individuals purchasing off our website, but even companies are now showing signs of not wanting to do a project such as refurbing their office space in case their income drops.

"We're increasing our marketing efforts, and going back to basics. We've taken a long look at where most of our leads come from, and we're maximising efforts in those areas with cost effective initiatives.

"We're introducing an NPS survey. Anyone who answers with a high score, we'll ask if they'll refer us to friends/colleagues/other businesses. We're doing a budget version using Survey Monkey for the initial survey and an email template signature to ask for the referral if someone responds positively.

"We've doing a data cleanse of our customer list, as that will give us a reason to talk to customers. We've also upped our e-marketing so that we stay at the forefront of our customers' minds.

"We've added PayPal's 'Pay in 3' option to our website to allow people to spread payments over a longer period of time.

"We've reviewed our costs and we're reducing our headcount by one. One of our staff is on a one-year contract which is due to end at Christmas, so we’ve chosen not to renew the contract but we've given the individual two months' notice so that they can find the right role to move onto.

"We've just gone through a pricing checking exercise as we deal with a lot of different parts and many manufacturers have had two or three price increases this year. We are working our way through our entire product list to check that everything is priced correctly."

Rachel Hayward, Enterprise Nation member and founder of Ask the Chameleon:

"As a home based business who was thinking about relocating into business premises, I have put this on hold. Now is not the time for increasing my expenses, and instead I am hunkering down, pouring over my cash flow forecast and re-assessing every item of expenditure going forward.

"This isn't the first time I have put my business outgoings under such scrutiny - I did this during Covid - so I am aware there is little opportunity for further reductions, but I am repeating the exercise with every item, just for my own peace of mind.

"The agility and frugality of a small business owner can never be underestimated, but the signs are worrying. With 500,000 small businesses who have already closed, I worry for the future - not just for myself but also my business friends. We urgently need stability and clear plans for support - the government (and the Bank of England) need to take note - there are 5.5m of us, we won't go quietly."

Fiona Scott, Enterprise Nation member and founder of Scott Media:

"I think it's time for the Dunkirk spirit in business - hunker down and stick to what you are good at, invest money wisely and be mindful but don't stop investing, look for opportunities and collaborations where possible.

"I've recently moved to a smaller office to cut costs yet I'm in the same building, still supporting another smaller business. Look to help, to have empathy, to negotiate and keep an eye on your numbers.

"The worst thing possible is to panic, stop planning and to bury your head in the sand hoping things will get better. Work with what you've got positively and move towards the future - it doesn't matter if you are moving more slowly as long as you are moving."

Julia Usher, managing director, Ashes Memorial Jewellery:

"As a small manufacturing and ecommerce jewellery business, the latest interest rise is of grave concern. We have found the past four months the most challenging in our company's history. Sales have been diabolical, with a decrease in sales of 38% year-on-year.

"I have been in the retail jewellery industry for 20 years and I have never been more anxious about the economic situation we currently find ourselves in. Christmas is vitally important to us as over 70% off our annual turnover happens from now onwards. With the further increase in interest rates this could lead to retail armageddon for many small retailers and big trouble for us.

"For our business, sales are far worse now than they were during the pandemic. We are very much in the luxury retail sector and understandably we are not at the forefront of people's minds at the moment. People simply are not spending currently on anything that is not essential.

"Like many small businesses right now I am fighting hard to survive and I am trying to implement changes to help. Actions include offering promotions across the website to try and encourage spend. I have also added two buy now and pay later options at the website checkout to try and help people who may need to spread the cost. I have also stared to be very mindful of the electricity consumption we use. If machinery is not in use we now turn them off. We have also focused on increasing our social media activity to try and reach more perspective customers."

Leonor Calaça, founder, Eleanor Shadow:

"My yarn business is owned and managed by me alone, so I am fortunate to not have to worry about firing employees. However, my plans of expanding from my home studio to a proper business premises has been put on hold indefinitely, since I don't want to hike up my expenses.

"The materials I work with - wool, yarn and dyes - have become more expensive since Brexit, and I can only expect prices to continue increasing. I'll have to protect myself by switching to a pre-order system, where customers pay to get an item I haven't yet created. This will keep costs to a minimum.

"Energy bills are also a worry. I have turned down my thermostat and will be working indoors with extra layers on. I'll have to make sure all of my yarn dyeing sessions are planned in a way as to minimise energy usage, even if it means I'll have to do more hours in fewer days."

Debbie Porter, managing director, Destination Digital Marketing:

"2022 has been a year where each difficult situation has been replaced by a wholly new and even more difficult situation. This time last year we were all beside ourselves with worry that inflation would hit 3% pre-Christmas and impact the Christmas selling period. Fast forward 12 months and we’re now worrying about the potential of hitting 13%.

"The general public's wallets have closed up to cope with the coming economic winter and the cash just isn't flowing. As a small business owner casting a hawkish eye over every expenditure has become a more frequent habit. I am also spending more time on managing late payments, which is the single biggest influence on cash flow for a small business.

"As a marketer I absolutely subscribe to the notion of marketing yourself out of a recession. We did this during Covid for ourselves and our clients, and now we’re doing it again. Perseverance and consistency are key to keep reminding your customers that you are still there, and your business is still stable.

"As some of your competitors pull back their marketing efforts, your share of voice gets bigger. This builds into the longer term plan of being there to activate that audience when they are ready to start spending again. We're guiding the brands we work with to weather the storm in this way, and we’re adhering to our own advice on this, too."

Relevant Enterprise Nation resources

A guide to the Energy Bill Relief Scheme

How are UK small businesses dealing with rising costs?

How small businesses can deal with a recession

Discuss challenges with fellow founders at online meet-ups

Book a free discovery call with a finance expert

An essential guide to cash flow management

Webinar: How to get paid on time in challenging economic times