What do rising interest rates mean for your business?


What do rising interest rates mean for your business?

In case you’ve been on safari or an extended sailing trip, you’ve probably heard that on Tuesday 3 May 2022, the Reserve Bank of Australia (RBA) raised the benchmark interest rate to 0.35 percent—up from a record low of 0.1 percent.

With the last interest rate rise being in 2007, this is news indeed.

We’ve been hearing a lot in the last few days about the straining effects this rate rise will have on mortgage holders and household budgets.

With around 37% of Australian households having a mortgage, there’s every reason this is a hot topic of concern.

Couple the rate rise with flat wages and rocketing cost of living, and you have a viable area of fiscal concern.

However, what we’re not hearing a lot about is the effect this interest rate rise will have on Australian small businesses. Let’s investigate the recent situation’s impact with SMEs and sole traders in mind.

Lower disposable income for consumers

When a large portion of the population need to pay more for housing, this inevitably leads to a smaller pool of available cash to spend on Australian small businesses. As such, one of the most significant impacts of the interest rate raise is the shaving down of disposable income.

Now, not every business will feel this pinch as much as others. If you’re in the food and beverage space, or provide many basic necessities or essential services, then you may not feel this squeeze as much as others.

If, however, your services or products fall into categories one might call ‘luxuries’ or ‘desirables’, you may be feeling that pinch a lot more acutely.

This is especially true of larger ticket items, as opposed to smaller or cheaper luxury purchases. This is often called the ‘lipstick effect’, whereby, in lean times, people still splash out on affordable niceties like lipstick, as opposed to furniture or vehicles.

Business owners can strategise wisely in respect to their specific offerings and prepare to either adjust their business model or cut their overheads to deal with the possibility of lower demand.

Difficulty in obtaining loans and sustaining growth

Yes, household mortgages will rise. So too will variable business loans.

Many business owners in Australia are either still paying off a current line of business credit or planning to apply for business financing to fund an expansion or invest in new assets.

If an SME is facing longer and deeper debt, an increased inability to grow their business with a further loan, and decreased business through household pressures, this could be a serious cause for concern. Not only will debt loads be higher, borrowing power and potential for growth will also decrease.

The issue is compounded if a business owner has purchased a property to run their business, which may also have a mortgage associated.

Decreased pressure on prices through lower demand

Australian business, of course, also need to make purchases of stock, services or other assets. When pressure is decreased in terms of demand, this will likely cool price points.

Circumstances depending, this could mean better deals for businesses that may otherwise struggle to purchase goods necessary to generate revenue. This may well be a silver lining that balances the scales.

Long term inflation management

The rate rise was also enacted to generally dampen the prospect of runaway inflation, which can have a grim effect on general prices and economic stability, which in the long term, could stave off worse business conditions.

As Aljazeera reported,

“Australia’s annual rate of inflation hit 5.1 percent in the January-March period, the highest since 2001.”

Reserve Bank governor Philip Lowe also commented on the point of high inflation,

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

He further expanded by noting that the combination of high inflation figures and evidence of improving wage growth called for the normalising of interest rates after years of being on emergency footing.

Sole traders may face uphill battle with taxes

As sole traders are responsible for diligently putting away a portion of their income for yearly tax bills, there may be an extra squeeze placed on this responsibility.

If demand is low, while interest on business or vehicle loans are high, savviness with savings will be key.

it’s imperative that sole traders become more conservative with expenditure and leaner in their operations to avoid the nasty implications of not having enough capital to deal with their tax concerns.

Now it’s time to strategise

The first step for SMEs and sole traders is to immediately invest some time with an accountant, bookkeeper, or business advisor to discuss and strategise ways to mitigate the effects of raised interest rates.

If you need to find an advisor near you, you can search for one using our free advisor search tool.

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