On Tuesday 7th June 2022, the Reserve Bank of Australia (RBA) raised the cash rate by 50 points to 85 basis points. The RBI cited increasing inflation as the reason for the significant interest hike. Throughout the start of 2022, the unemployment rate declined to 4 per cent, and participation rates grew to a record high of 66.4 per cent in February. These figures may indicate that the economy is in a strong position, but what happens when the economy grows too fast? Interest rate hikes.
Rising interest rates and persistent inflationary pressure impact small and medium-sized enterprises (SMEs) in many ways. While these impacts present some difficult challenges to overcome, business owners and leaders have an opportunity now to make changes proactively, so their well-positioned to weather and possibly grow through periods of further uncertainty. Keep reading for an overview of how SMEs are impacted by the rising interest rate environment and what businesses can do to manage risk and be prepared.
As the RBA continues increasing rates, which it is expected to do in line with other central banks globally, your interest rates on any debt will also increase. While fixed-rate loans won’t be affected by rising interest rates, variable loans and new lending will be impacted. If your business has any variable rate loans or lines of credit, now is a good time to refinance these debt facilities to a fixed rate. In the short to medium term, your rates might be higher than on a fixed-rate loan, but it protects your business against the impacts of future rate hikes. Further, having fixed-rate debt means you can better plan your expenses, making cash flow forecasting more accurate. This will allow you to be as informed as possible when making any further adjustments in your business, such as increasing or downsizing your team or investing in assets such as new equipment.
Credit card interest rates are among the first to rise following a cash rate hike. This results in higher monthly repayments if you carry a balance on your business credit cards. According to an August 2021 survey by NerdWallet, 39 per cent of new business owners have used a credit card to fund their business since March 2020. To mitigate the risk of your business credit card debt negatively impacting your business’s finances, pay off outstanding credit card debt as soon as possible. If that’s going to stretch your finances, consider a balance transfer credit card with a long interest-free period. On many credit cards, this can be up to 55 days. Combined with solutions such as trade finance, you can keep your cash flow consistent and business operating without accumulating an expensive credit card debt.
Many SMEs often struggle to access finance from traditional lending channels, and in a rising rate environment accessing capital can become harder. Between March and February this year, there was a $10.9 billion increase in bank lending to non-financial businesses taking nationwide lending by banks to $879 billion. Whether your company has finance facilities with banks or alternative lenders, it’s wise to ensure that your finances are strong, especially in a rising rate environment. This allows you to shop around for finance at your discretion, not because other lenders have turned you down. Of course, for newer businesses or those seriously struggling financially after the last two years, your immediate focus may be consolidating your loans and accessing finance quickly to recover. Moneytech’s SME recovery loan, for example, helps businesses access a business line of credit facility of up to $5 million to fund day-to-day working capital requirements, support investment in the business, and refinance existing debt.
Australia’s big four banks confirmed it would reflect the May cash rate increase in its mortgage offerings. With households now faced with higher loan expenses, consumer spending can decline as homeowners decide to cut back on discretionary spending to service their increased loan repayments. It takes time for these impacts to work through an economy, but further rate hikes, which are expected, may prompt consumers to tighten their spending habits. To proactively prepare for declines in discretionary spending, identify where and how your revenue may decline. From here, it’s a good idea to assess if it’s worth creating more flexible payment options for customers where it’s appropriate, raising equity, or selling off a part of the business that is a financial drain on the rest of your operations.
As with any economic or monetary policy changes, these take time to be felt throughout an economy. While the RBA has only just begun raising rates, and the impacts may not be apparent yet, businesses should proactively look at their finances and determine how to best prepare for further rate hikes. Taking the time to do this now can be the difference between smoothly weathering further economic challenges or further rate hikes severely affecting your business’s stability.
As Australia’s only purpose-built and fully integrated business growth platform, Moneytech partners with businesses to support them with recovery and growth. Whether your business is seeking working capital to cover your day-to-day expenses or you’re looking for funds to invest in growth opportunities, we can help. Contact us today, and one of our experts will be in touch to discuss your options.