A change in interest rates can create both advantages and disadvantages for a

business.

One advantage of lower interest rates is that borrowing becomes cheaper. If the
business has taken out a bank loan, its interest repayments may fall. This reduces its
expenses and may increase its profit. The business could use the additional profit to
purchase new machinery, open another branch or increase production.

Lower interest rates may also encourage the business to borrow money for expansion.
Since the cost of finance is lower, investment projects may become more affordable.
For example, the business may be able to introduce a new product or improve its
technology. This could increase productivity and sales in the future.

Another advantage is that lower interest rates may increase consumer spending.
Customers with mortgages and loans may have lower repayments, leaving them with
more disposable income. They may therefore buy more of the business’s products,
increasing sales revenue and possibly market share.

However, lower interest rates can also be a disadvantage for a business with large cash
savings. The business may receive less interest income from money held in a bank
account. This could reduce its total income, although this is likely to be less important
than the benefit of cheaper borrowing.

Higher interest rates can create several disadvantages. The cost of existing variable-
rate loans may rise, increasing the business’s monthly repayments. This increases
expenses and reduces profit. The business may therefore have less money available for
advertising, recruitment or expansion.

Higher interest rates also make new borrowing more expensive. The business may
decide not to purchase new machinery or open a new branch because the expected
profit from the investment may not cover the higher cost of the loan. This could slow
down the growth of the business.

In addition, higher interest rates may reduce customer demand. Customers may have
larger mortgage and loan repayments, leaving them with less disposable income.
Demand is likely to fall particularly if the business sells expensive or non-essential
products. This could reduce sales revenue and may force the business to lower its
prices.

However, higher interest rates may benefit a business with large cash savings because
it may earn more interest income. Higher interest rates may also discourage
competitors from borrowing money to enter the market or expand. This could reduce
competitive pressure on the business.

Overall, the effect of changing interest rates depends on the financial position of the
business. A business with large loans and customers who buy non-essential products is
likely to be badly affected by higher interest rates. In contrast, a business with little debt
and large cash savings may benefit from higher rates. On balance, lower interest rates
are likely to be more beneficial for a growing business because they reduce borrowing
costs, encourage investment and increase consumer demand.

In 2015, Haji Biriyani’s total costs were 11 000 000 Tks. By opening a fourth restaurant
the restaurant group estimates that its total costs will increase by 20%.

(b) Analyse the possible impact of a rise in Bangladeshi interest rates on Haji Biriyani.
(6 Marks)

A rise in Bangladeshi interest rates could increase the cost of borrowing for Haji Biriyani.
The business may need a bank loan to finance the opening of its fourth restaurant,
which is expected to increase total costs from 11,000,000 Tks to 13,200,000 Tks. Higher
interest rates would increase its loan repayments and fixed costs. Therefore, Haji
Biriyani would need to earn more revenue to cover its costs, increasing its break-even
point and reducing its profit.

Higher interest rates could also reduce demand for Haji Biriyani’s food. People living in
Dhaka may have to pay more interest on their mortgages and other loans, leaving them
with less disposable income. As eating in a restaurant may be considered non-essential
spending, customers may visit Haji Biriyani less often. This could reduce its sales
revenue and cash inflows, making it more difficult to pay the additional costs of the
fourth restaurant and increasing the risk of business failure.

Higher interest rates → more expensive loan repayments → higher fixed costs → higher
break-even point → lower profit.