What do rising government borrowing costs mean for your business?

Recent economic developments have sparked concerns among UK businesses. Government borrowing costs surged in December to their highest levels in four years, and this has drawn heavy criticism of the Chancellor’s fiscal strategy.


The BBC reported that the gap between government spending and tax revenue widened to £17.8 billion in December, compared with £10.1 billion a year earlier. This was notably higher than the Office for Budget Responsibility (OBR)’s forecast of £14.6 billion.


Adding to this, interest on government debt reached £8.3 billion in December, the third highest on record for the month since 1997. While yields on 10-year gilts have since retreated to 4.5% (they peaked at 4.9%), the situation underscores the volatility of financial markets.


What do these developments mean for your business, and how can you respond to any challenges ahead? Let’s explore.


The ripple effects on businesses


Rising borrowing costs often signal trouble for businesses seeking financing. Elevated gilt yields – which influence corporate borrowing rates – could result in higher interest payments on loans. If your business relies heavily on debt financing, this means tighter budgets and less room for growth.


Another concern is the potential for reduced government spending. As more public funds are directed towards servicing debt, the government may cut back on infrastructure projects, public services, or business support schemes. This could directly impact you if you depend on public sector contracts or subsidies.


Inflationary pressures add another layer of complexity. Predictions of rising US inflation due to tariffs under Donald Trump’s administration could disrupt global supply chains. This may mean that the cost of imported goods and raw materials could go up. While the latest UK figures show that inflation here has dropped back again, this international factor could put pressure on your profit margins, especially if they are already tight.


It's worth noting too that rising borrowing costs aren’t unique to the UK government. France, Italy, Spain, and Germany are also experiencing pressures. Differences in how these nations respond to these pressures could further affect the financial and economic environment.


Navigating the challenges


To stay ahead, you may need to review your financial strategies. If you have existing debt, you might consider refinancing to lock in lower interest rates while they are available, if these look likely to increase. Diversifying your funding sources, for instance by inviting equity investment, might be a way of reducing your reliance on traditional loans.


Rising costs have been with us for some time and cost management continues to be a key focus. Can you streamline the way you do things to trim expenses without compromising quality or reducing customer satisfaction?
Building resilience is important. Where you can maintain healthy cash reserves, this will help you to weather economic fluctuations.


Some think the pressure on the Chancellor might result in an adjustment to tax and spending measures in the Spring Statement in March. This could potentially provide some good news to businesses if taxes are reduced in some way. However, the government’s strategy appears to be to promote growth as the way forward. This may mean that measures are introduced that could help your business grow. It may pay to be alert to government proposals.


Adapting for the future


Ultimately, staying informed and flexible will be key. While the current economic environment looks challenging, staying agile and proactive can help you to find opportunities amid the uncertainty.


If you would like help reviewing your financial strategies or need a cost audit, please contact us at any time. As experienced business advisers, we would be happy to help you position yourself for future growth.


See: https://www.bbc.co.uk/news/articles/cpwxzpqrnjko