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How rising interest rates can impact on debt

With interest rates likely to rise further in 2022, many could find themselves under increased financial pressure. Therefore, robust credit control and efficient debt management are more important than ever.

It seems that the era of super-low interest rates may finally be over. The increase from 0.1% to 0.25% announced by the Bank of England on 16 December is potentially just the first step in a slow but steady rise in rates in an attempt to keep inflation under control. At least one more increase is expected during the first quarter of 2022, with more likely to follow throughout the year.

The concept of relatively cheap borrowing has become embedded in our national psyche. Following the financial crash of 2007-8, interest rates steadily declined to 0.25%. Small increases between 2016 and 2018 were reversed less than two years later in response to the COVID-19 pandemic, taking the rate to an historic low of 0.1%.

Why do interest rates matter?

It's not just important to consider the effects of rising interest rates on your own finances; you also need to think about the effect on your customers. The impact of increased borrowing costs will be felt by businesses and individuals alike, particularly those who have taken on large debts on the back of cheap finance. Even with a relatively small increase to 1 or 2%, they could find their cash flow squeezed, with debt repayments difficult to meet or, at worst, unsustainable.

Inflationary pressure has made a gradual rise in interest rates a necessity. However, while it’s a tried and tested tool for bringing inflation down, there’s also a risk that rate rises could impact economic growth. A downturn in sales could put further strain on the balance sheets of many businesses and lead to job losses. With job insecurity and increasing mortgage costs, many individuals may find their spending power severely reduced and may struggle to meet their monthly outgoings.

With all this in mind, now’s the time to tighten up your credit control procedures. Here are a few simple steps you can take…

Diligent housekeeping

It's always important to send timely statements and reminders, as well as chasing overdue payments promptly. However, when the economic going gets tough, basic credit control processes are mission critical. Make sure your team stays on top of things or put your credit control in the safe and capable hands of a debt collection agency.

Early referral

With increased risk of default, it's important to act sooner rather than later. That means keeping a close eye on those customers who may be most affected by the rise in interest rates. If you have concerns about their ability to settle debts in a timely fashion, it makes sense to refer them to a debt collection agency at the earliest opportunity.

Priority status

It's likely that you won't be the only company or organisation that's chasing a customer for money, so it's important to establish yourself as a preferential creditor. Having the support of a professional debt collection agency can help you achieve prioritised payment.

Reassuring support

It's a simple rule of economics; higher interest rates mean higher risk of bad debts. At Redwood Collections, we're here to help you mitigate that risk. We can support you with everything from robust debt management to efficient debt recovery and authoritative advice on taking legal action. The economic outlook may be uncertain, but we can help you face the future with confidence and Grow Stronger.

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