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FPS chairman's blog: Are we ready for interest rate rises?

With Mark Carney and the Bank of England Monetary Policy Committee dropping more than a few hints of a sooner rather than later rise in interests rates I wonder how many speciaist construction firms are prepared for its impact?

Follow the media and it’s all too easy to think of interest rates as more a worry for homeowners with mortgages than having any impact on the specialist construction firms, but this is not the case.

Many are enjoying the first signs of economic recovery, with swelling order books and an optimism that for once is justified. However, these same companies may well have struggled over recent years and have loans to service. Equally, those companies that have bought plant and other equipment on finance, to service the increasing workflow, may too find themselves impacted upon by rate rises.

A recent survey, published in April of this year by the Institute of Chartered Accountants in England and Wales found 65% of British businesses had not planned any measures to deal with rising interest rates, such as changing existing finance arrangements. More concerning was that, of 500 firms questioned, it found that a third of businesses that expected rate rises to have a negative impact on turnover were in the construction industry. Some of this will be from the inevitable slowing of the economy the rate rises are intended to control, but it is also from the general uplift in costs from sources such as raw materials price rises, the slowing of demand and through the channeling of finance for planned projects.

The most significant concern raised by the survey was the complacency of the business sector, which it found that less than 65% of businesses did not have any measures in place to deal with interest rate rises, including looking at existing finance and changing arrangements accordingly.

The sooner-than-expected momentum behind interest rate rises makes the need to consider the possible impact on business increasingly critical. The Federation of Piling Specialists (FPS) has many members, large and small, and recognises the impact interest rates will have on their businesses. It is urging them all to be aware of its possible impact on their businesses, but it is the construction sector as a whole that needs to take stock and plan for the inevitable rather than deal with it as it arrives.

Committing to the recent fair payment charter and supporting initiatives like the National Specialist Contractors Council’s fair payment campaign, are important too. Being paid on time means loans can be repaid earlier which means, regardless of the prevailing interest rate, the charges will be less. As an industry we must also continue to push for the end of retentions – large sums of cash withheld from payment can make all the difference to cash flow and in releasing cash that would otherwise have to be funded by a loan or overdraft. Interest eats into margins and the higher the interest rate the greater chunk it will consume.

The recovery is still fragile and while revised UK construction data issued in June 2013 points to a faster first quarter GDP growth, interest rate rises may dampen this. So while we are enjoying a good period, we should recognise that it could all change quickly. A little bit of planning and forward thinking may help ensure your business is strong and prepared for the unexpected, but it will also help make sure the recovery most construction companies are seeing is sustainable too.

  • Martin Blower is the chairman of the Federation of Piling Specialists

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