Starting a new business is a difficult endeavor at the best of times, whether building a competitive offering in a saturated industry or forging a path in a new one altogether. Whatever your vision, though, additional challenges are frustrating the funding of business in 2022.
What are these challenges, and how can you fund your business around them? In this article, we’ll cover some of the main factors affecting the economy and businesses trying to navigate through changing market conditions.
Rising Interest Rates, and Market Conditions
The chief concern espoused by experts regarding investment into new businesses and ventures relates to the proposed action by the Bank of England, in the wake of unsustainable increases in the rate of inflation.
The inflation rate has been hovering around 10%, with its initial rise precipitated by hikes to supply costs and wholesale energy, respectively.
The Bank of England’s plan to reduce the impact of inflation in the short- to medium-term involves increasing the rate of interest. This is a bold move by central banks in times of inflation, to directly target investments and attempt to reduce the number of businesses and individuals spending on financial products.
By rising interest rates, the Bank of England is effectively increasing the ‘cost’ of taking out lines of credit – which can render unsecured loans prohibitively expensive for new businesses. The rise in interest rates will also have a key knock-on effect in property markets, where mortgage costs increase for those on variable rates.
The end goal behind this is to reduce demand for products and services in the economy gradually and help reduce the levels of inflation as a result.
This is a very challenging and delicate action plan that has to be carefully balanced with the potentiality of causing an economic crash, leaving millions of people unemployed and businesses closing down if done too hastily.
On the other hand, the risks associated with not raising interest rates to tame inflation can be much worst and longer lasting than leaving interest rates as they are. We can look to countries such as Turkey for example who currently has a rate of inflation of about 80% – as of Sep 2022.
This situation has widely been agreed (in the international community) to have been caused by government ideological beliefs that interest rates should be kept low and not increased accordingly.
Fortunately for the UK, this isn’t the case and businesses have a bit more certainty about the direction of the economic environment ahead. For new businesses, however, this is a tough time to get started, especially if they need funding.
Funding a Start-Up
Even with the Bank of England specifically attempting to stymie expenditure, a business can find its feet. There are several opportunities and financial products available to entrepreneurs, depending on their situation and network.
One unorthodox route to starting a business can be found in a product used primarily for retirement pay and early mortgage repayment: the equity release mortgage.
How equity release works are that a lending institution gives a homeowner a portion of their home’s equity in advance, on which they can choose to only repay the interest. The debt is repaid on the sale of the home in later life. Over-55s can use equity release to access their wealth and directly invest in new businesses while only paying interest.
The key to starting a business in difficult economic times is to reduce the cost of the investment and projected overhead costs. Equity release sees costs offset significantly; secured business loans will have lower interest rates than unsecured ones, and venture capital or angel investment can circumvent market interest rates altogether.
The Outlook in 2023
The market outlook in 2023, having outlined above the economic and business factors many faces this year, is not a positive one. Though inflation is projected to stabilize more in 2023, cost increases will not be reversed.
New businesses, though, may be more resilient than pre-existing ones; having been born into high overhead costs and minimal financial assistance, any future measures can prove disproportionately growth-friendly.
The Pound has notably dropped in value against other global currencies such as the Dollar and Euro and isn’t likely to head back to the levels once enjoyed 5 years ago and beyond.
It’s worth mentioning however that this is in large part due to the Dollar gaining increasing value from their central bank raising core interest rates, and the fact that investors tend to rely on the Dollar to protect themselves during volatile global market conditions.
Beyond that, the best we can hope for is an end to ongoing conflicts in Ukraine and better energy production here at home to help offset the levels of inflation the UK is experiencing.
Inflation in the energy sector is particularly high and exceptionally influences the levels of inflation of other sectors and industries in an economy. This is because oil and gas are the main pillars of modern economies and without them, many industries and public services would simply cease to exist.
This new business and economic environment will increasingly reward efficiency more than ever before and business models with low overhead costs will be much better prepared to survive the headwinds ahead.