Following the announcement that the Bank of England would hold the base rate at 0.1%, we were keen to explore what this means for hospitality businesses today and into the future. So we spoke to Richard Andrew, Head of Accounting at Armstrong Watson LLP, to find out more.
Commenting on the impact the base rate will have on businesses within the hospitality sector, Richard said:
“The decision by the Bank of England to hold the base rate at the historically low 0.1% will be a relief for individuals and businesses with variable interest rates on their debt finance. However, with inflation expected to reach 5% next year an increase in the base rate seems
inevitable at some point in the near future.”
“The bank’s Monetary Policy Committee (MPC) said there was “value” in keeping the base rate at its current level to see how the jobs market coped with the end of the furlough scheme, though Andrew Bailey, the Governor of the Bank of England, added it is likely interest rates will rise over the coming months to “bring inflation sustainably back to target”.
“As many hospitality businesses took on additional debt finance to see them through extended periods of closure throughout the various lockdowns, now is the right time to review and consolidate their debt structure as a whole.”
With many businesses taking on additional loans to support them through the pandemic, it will be imperative that businesses have a plan in place for paying off their debt.
“The repayments on CBILS and Bounce Back loans are starting for many businesses following a repayment-free period. The repayments will be spread over five years, so this will add strain on the cash flows of businesses, particularly over the winter off-season.
“Although Bounce Back loans have preferential rates, it may still be advisable to discuss consolidating these loans with other debt such as commercial mortgages and business loans with longer repayment periods. There may be arrangements fees and break fees to consider, but if this provides a manageable repayment profile it will protect the business.
“Some hospitality businesses operating in tourist destinations have had a successful summer, replenishing cash reserves to healthy levels from pent up demand and staycations. Where this is the case, paying down debt to save interest costs will be an attractive option seeing as those cash deposits are earning virtually no interest sat in a bank account. Before doing this, hospitality business owners need to consider whether these funds might be needed for reinvestment / refurbishment projects or contingency funds in the short and medium-term. Obtaining additional finance for such reasons is likely to be more challenging than pre-Covid times.”
With the base rate holding, many businesses owners and homeowners alike are considering whether it’s a good idea to switch to a fixed interest rate.
“If you are considering refinancing your business debt you should consider fixing the interest rate you will pay for part or all of the period of repayment. This will protect the business against future interest rate rises and provide certainty over the value of monthly repayments.
“However, bear in mind that a fixed rate will be more expensive in the short term because anticipated interest rate rises are factored into the fixed interest rate you pay. It’s likely that any interest rate rises will be in small increments and over a period of time to avoid a shock to the recovering economy. As such, you need to weigh up the peace of mind provided by fixing your repayments against the likelihood of significant increases in the base rate.”
Hospitality business owners should be reviewing the protection they have in place to repay their debt if the worst happens.
On this topic, Richard said:
“It’s prudent to have a life cover policy in place to repay some or all of the debt in the event of a business owner’s death. From experience, the majority of businesses have not reviewed their protection to ensure it is sufficient to cover increased debt levels arising throughout Covid.”
To summarise, Scott McKerracher, Head of Commercial at The Cumberland added:
“The economic impact of the pandemic is increasing pressure on businesses in terms of costs. Therefore, the way in which businesses handle the repayment of pandemic debt will be imperative. While the decision to hold the base rate is good news for businesses with variable interest rates on their debt finance in the short term, with an increase in the base rate on the horizon, it will be crucial that businesses review their overall debt structure and impact on sustainable cashflows”.
“At The Cumberland, we continue to support our new and existing holiday let, guest house and hotel customers as the UK navigates its way out of the pandemic”.
To find out more, visit the Armstrong Watson website.