Interest Rate
The cost of borrowing and the reward of saving.
Borrowing money naturally comes at a cost, and that cost is dictated by the interest rate, as well as any additional fees that may be applicable. When your business saves money, the opposite happens – it earns interest. The better your firm understands how interest rates work, the better prepared you will be for any interest rate change.
How do interest rates work?
The Bank of England sets the bank rate, or base rate, for the UK. This, in turn, can influence the interest rates that financial institutions like banks set. If the base rate increases, for example, lenders may also charge more due to the increased cost of borrowing.Practical Application Example
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If you borrow £2,000 for your business and the annual interest rate is 10%, you’ll need to pay back the original £2,000, plus 10% of that amount (£200). The amount that you will have to pay back after one year is therefore £2,200. ”
