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How do Higher Interest Rates affect Businesses?

As a small business owner, you’d be well aware of the current economic conditions, both at home and around the world. Inflation has been a persistent theme for 2022, and it shows little signs of abating soon. With this in mind, most central banks globally have started raising interest rates to curb demand and slow down upwards price pressure on goods and services, particularly in response to supply shortages, energy crises and geopolitical tensions. Australia has not been immune, with the RBA committing to the official cash rate rises required to reign in inflation at home.

Rising rates have a significant impact on almost everyone, many of who have perhaps become accustomed to low-interest rates and benign inflation for decades. Businesses must adjust to rising rates, firstly by understanding how higher rates affect their customers, business finances and overall operating position. Let’s take a look at the main factors to consider for your business in relation to rising interest rates.

Higher rates impact your customers’ loan repayments

The first thing people think of when rates rise is their mortgage repayments. When the RBA announces an increase in the official cash rate, you can be sure the Big Banks will be close behind them. With so many Australians holding a variable mortgage, rising rates mean their repayments will jump. In recent months this has undoubtedly been the case. With more funds going towards paying the bank, fewer funds are available to buy everything else – more than likely, including the products and services your business offers.

Interest rates for consumer lending, such as vehicle finance and short-term personal loans, also increase, impacting the ability of everyday Australians to travel, entertain, and purchase new things. With fewer free funds available, consumers might turn to savings. Either way, consumer confidence is likely to remain negative and spending relatively subdued as long as further rate rises are on the table. This is something every business needs to consider when setting prices or advertising offers – lower margins might be a short-to-medium-term reality.

Changing interest rates affect foreign exchange

Higher interest rates, and particularly interest rate rises relative to other countries, are key drivers of input costs and foreign exchange rates. On the one hand, higher interest rates are implemented to cool the economy and reduce inflation. There are signs this may be having an impact, and that price increases can be expected to moderate moving forward. From this lens, higher rates may help reduce cost pressures that offset the potential drop in your customer’s appetite to spend.

On the other hand, threats of a global recession amid coordinated interest rate increases by central banks have put increasing pressure on the Aussie Dollar. If your business imports goods from overseas, it’s likely the costs have jumped significantly, particularly if sourcing from the USA.

Some businesses that predominantly export goods and services will feel the opposite impact, as a lower local Dollar reduces the effective price for overseas buyers, propping up their competitive position in the global marketplace. Nonetheless, you must be aware of how foreign exchange rates impact your bottom line in a changing economic landscape.

Increases the cost of business loans

Just as higher official cash rates impact consumer loan repayments and spending, it also does the same for businesses. Any business with an outstanding loan or financing facility with a variable component is liable for increased repayments, particularly unsecured credit often used by smaller businesses. Increasing repayments means reduced free cash flow to spend or invest in other areas of the business.

Businesses may choose to delay paying for their receivables, which may further impact your cash flows if you sell goods or services on credit terms to your B2B customers. If you find your outstanding receivables are taking longer to be repaid, or you just have difficulty sourcing a business loan with suitable rates, debtor finance is another option to consider. Providers will pay cash upfront based on raised, unpaid invoices. It’s a financing option linked to your sales, so if they reduce, your payments do too – you’re not tied to a fixed repayment schedule or amount.

Higher interest rates also mean lower borrowing power for businesses looking to secure new credit. This hampers their ability to invest in growth, whether purchasing equipment, acquiring property or hiring new staff.

The importance of a suitable funding solution is even more critical as rates rise, as is the value of an experienced broker. Capital Plus Finance is a professional business finance broker that has your best interests at heart. With a panel of over 50 lenders, The Capital Plus Finance team will do everything to help you secure a suitable finance solution, including debtor finance and business loans that fit your budget. Please call us anytime to find out more or to have an obligation-free chat about your personal and business situation.