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Which two of the following could be the effects on small businesses if interest rates were to rise significantly? Select two answers - Edexcel - GCSE Business - Question 10 - 2016 - Paper 1
Question 10
Which two of the following could be the effects on small businesses if interest rates were to rise significantly? Select two answers. A. Improved net cash flow B. ... show full transcript
Worked Solution & Example Answer:Which two of the following could be the effects on small businesses if interest rates were to rise significantly? Select two answers - Edexcel - GCSE Business - Question 10 - 2016 - Paper 1
Step 1
Reduced consumer demand
Answer
If interest rates rise significantly, borrowing costs for consumers increase. As a result, consumers may reduce spending, leading to decreased demand for goods and services sold by small businesses. This effect can negatively impact the overall turnover and profitability of these businesses.
Step 2
The risk of insolvency is greater
Answer
Higher interest rates mean that small businesses with existing loans will face increased repayments, which can strain cash flow. If these businesses cannot manage their finances effectively, the risk of insolvency may increase, particularly for those with tighter financial margins.