Finance – a matter of interest

With interest rates at a record low, it's easy to get lulled into a false sense of financial security. But as the only way from here is up, Nick Huber examines ways to mitigate the impact of an eventual rise.

Interest rates are at a record low. The Bank of England base rate is currently 0.5%. This means that many hotels, restaurants and bars are benefiting from relatively low mortgage and loan repayments.

But some experts say that interest rates could rise over the next year or so in order to keep inflation in check as the economic recovery gathers pace.

Any rise in interest rates could hurt the finances of companies in the hospitality industry, especially smaller operators that lack the capital cushions of larger rivals.

Fortunately, a little planning can help mitigate the impact of a rise in interest rates.

Financial experts are divided over the chances that rates will rise and, if so, when and at what speed. Some think they are unlikely to rise significantly, because this would risk choking off the recovery and pushing the economy back into recession; others predict that interest rates will rise sharply, possibly up to 4% or even 5% by 2011, in order to keep inflation in check as the recovery gathers pace.

"The common view, at least for the next year, is that interest rates will remain the same unless inflation starts to increase, which would surprise most economists," says Richard Bradley, director of commercial finance at Alexander Associates. "If this were to happen, then the Bank of England would have no choice but to increase rates."

Martin Bamford, a chartered financial planner and managing director of Informed Choice, says that the outlook for interest rates is mixed. "Most commentators seem to agree that a further rate rise this year remains unlikely, as it could stifle what is quite a fragile economic recovery," he says. "Price inflation remains a concern - while the latest inflation figures suggest a reduction in the rate of inflation there is a chance it could change direction and force the Bank of England to increase rates to manage it."

So, with an uncertain economic climate ahead, what can independent companies in the hospitality industry do to protect themselves against the possibility of interest rate rises?

RENEGOTIATE YOUR DEBT

You can avoid a rise in your loan repayments when interest rates do rise by switching from a variable-rate tracker mortgage, which is linked to the Bank of England's base rate of 0.5%, to a fixed-rate mortgage. Although these loans are more expensive than variable-rate trackers, some lenders are offering competitive rates of less than 4%.

Companies taking out new mortgages can opt for a fixed-rate loan for a period of time, or for the duration of the loan. Information on the best-buy rates is available on numerous personal finance websites such as Moneysupermarket.com or uSwitch.com.

Companies with existing loans can purchase a "swap" rate. This is when a company paying a floating interest rate on their loans wants a fixed rate and another company is paying a fixed rate but wants a floating rate. The two parties swap their interest rates.

GET THE BEST FROM YOUR SAVINGS

"Businesses should be proactive when it comes to getting the best returns on any corporate savings they have," says Bamford. "It pays to shop around, as there are some good deals to be had, particularly if you are prepared to go for a fixed-term deposit account for six or 12 months."

REVIEW YOUR FIRM'S FINANCES

Now is a good time for a thorough financial review. Focusing on basics such as cash-flow will mean that your business is better prepared to withstand a rise in interest rates.

"Improving cash-flow can be the key to success," says John Cullen, partner at accounting firm Harris Lipman. "Companies in the hospitality sector need to focus on their expenditure just as much as their income. There is nothing wrong in trying to increase turnover, but high outlays like rent should be targets for review.

"If a business is struggling and the high rent may be the key, approaching the landlord and having a frank discussion may solve the problem. Landlords do not want empty premises, and if that becomes a serious threat, perhaps a rent reduction or the negotiation of a rent holiday might be the solution. At the same time, cutting advertising may be a false economy."

SEEK HELP FROM THE TAXMAN

Struggling businesses can ask the taxman for additional time to make their tax payment under the Government's Business Payment Support Service.

HM Revenue & Customs staff will review your circumstances and discuss temporary options tailored to your business needs, such as arranging for payments over a longer period.

Additional charges for late payment will not be charged under this agreement, although interest will continue to be payable on the taxes where applicable.

PROPERTY - SALE AND LEASE

Hospitality companies that own their own freeholds can unlock the value of their properties through a "sale-and-leaseback" deal. This involves an owner of, say, a restaurant selling their premises to an investor and then leasing back the property for a set period, paying rent to the investor.

"The restaurant owner releases the equity, or the value that is tied up with the property asset, and then puts that value back into their business," explains Daniel Mendoza, director of Ereia Mendoza, a commercial property adviser.

This option will be more advantageous to companies that have paid off the mortgage on their properties, because the sales will be pure profit. Struggling businesses will find it harder to attract a buyer.

RENEGOTIATE ON SUPPLIES AND RENTS

"The time to prepare for interest hikes is now," says Katie Papworth, solicitor on the hotel and leisure team at law firm Thomas Eggar. "Audit your business, renegotiating with your suppliers and implementing cost-saving restructuring strategies so that you are leaner and fitter to combat the potentially rocky road ahead. Vital planning now will ensure survival and position you to emerge into a better economy stronger and more innovative than your competitors.

"Also, try to renegotiate with your landlord. In the current market, if tenants are willing to sign up to a new term now, they may be able to renegotiate a more favourable deal as landlords look to tie businesses in for longer."

FIVE WAYS TO PREPARE FOR HIGHER INTEREST RATES

â- Put money aside in a savings account if your current loan repayments are relatively low and leave you with money to spare.

â- Review your finances. Check your cash-flow. Cut costs where possible to ensure your business is better placed to withstand future economic shocks.

â- Consider releasing equity from your property by entering into a sale-and-leaseback arrangement with an investor.

â- If interest rates rise and start to cause you financial difficulties, tell HM Revenue & Customs at an early stage. You may be given extra time to pay your taxes.

CASE STUDY: KARL HARRISON

Karl Harrison owns three restaurants in the West End of London. He had three commercial mortgages, each with different interest rates. The monthly loan repayment was £3,762.

Harrison, advised by Alexander Associates, extended the mortgage by £50,000. He used part of the extra money to refurbish one of his restaurants. The new loan was on a lower interest rate, which reduced Harrison's monthly mortgage repayment by a third.

The lower mortgage repayment was achieved by "cross-collateralising" the loan against the three properties. This is when you secure one loan against other properties or businesses and spreads the risk for the lender in case one business is not performing as well as the others.

Harrison explains: "My monthly payments have reduced by a third, which has allowed me the potential to increase my turnover by increasing the number of covers we have now. It also turns my restaurant into a much more desirable place to be."