Trading in a rising interest rate environment

Although the impact of rising interest rates varies by business, it’s usually preferable for most small businesses to have low interest rates. It’s cheaper to borrow money to grow, or at least with stable interest rates, you can plan for and repay whatever loan you committed to.

Cracks can appear however, when interest rates climb faster than anyone predicts. For example, if business owners find their loan repayment interest rate doubling in a few months, it will be problematic if they have tight margins. This is especially true when people have been happy to borrow, thinking the record low borrowing and cash rates would hang around forever (or at least a few more years). On-going rising interest rates reverses this trend and can cause financial stress, where businesses have borrowed large sums of money in the expectation interest rates would remain the same for a little longer.

Here are a few issues with rising interest rates for small businesses.

Customers spend less

Probably the broadest impact from rising interest rates is that mortgage rates and business loans goes up. Your customers will be allocating more of their weekly wage to repaying interest, with the consequence of less disposable income to spend. If you are in an industry that is deemed discretionary by the consumer, you could be the first expense to face the chop.

Other implications include:

• Higher interest rates make it more attractive for consumers with spare cash to save (they get a higher return on deposits). This takes more money out of the system.
• If many of your customers use financing (credit cards or pay later products), they may be reluctant to buy as much or as fast, as this cost of credit is also rising.
• The whole economy can slow. Siphoning off even a small amount of spending can starve other industries.

Harder to access credit

While higher business loan rates make long-term debt more expensive, short-term debt can also be harder to obtain. Lenders that require physical assets to secure financing will most likely want tighter requirements, such as more equity or personal guarantees. This increases the risk to you as the borrower.

Your costs go up

Additionally, other costs to your business will also likely start to rise. For example:

• Your employees will probably be feeling the interest rate pinch if they have household debt. Their first port of call could be to ask for a pay raise, which increases your overhead. Even worse, key employees could leave for higher pay somewhere else.
• ⁠If your business isn’t affected by interest rate changes, some of your suppliers, partners or distributors most likely will be. As a result, they could be seeking to increase their prices to cover their margins and may want to negotiate new payment terms.

This inflationary pressure drives up the cost of the whole supply chain (manufacturing, distribution, services), which trickles higher expenses into your business.

The ultimate conclusion? You don’t want your suppliers to go bust, so you’ll probably need to accept their cost increases, which eventually forces you to increase prices to your customers, causing a possible drop in demand.

Predicting future costs is difficult

When interest rates are changing, you may struggle to know the cost of future borrowing, or the cost of existing business loan rates. This can make it hard to plan your future finances, and when to invest in new equipment or business growth.

Solutions to rising interest rates

• If rising interest rates are causing you sleepless nights, then take action to reduce the impact.
• Delay buying any big ticket items if you can, if they drain your cash reserves or require a big lump of debt. You may be able to get by for a time or think of a Plan B, such as repairing, renovating or refurbishing.
• Pay interest only on any loans. This will reduce your monthly payments and push out your repayment date, but if the interest rate increase is causing undue stress, it could be a temporary option.
• Refinance (or delete) credit cards and any other higher interest products you use. It may cost a little more in administration to track and pay for expenses as you go, but it could give you the breather you need.
• Refinance loans with a longer fixed term, giving you some protection against further increases outside your control.
• Tie new loans to known cash flow. If you have a new contract that lasts 3 years, any borrowing can be linked to that term. When the contract ends, so does the loan.
• If you’re planning to get a small business loan, do it sooner than later, especially if you can afford the repayments now and believe the interest rate increase will continue.
• Start exploring other financing options such as angel funding, crowdfunding, friends and family or government assistance. There could be opportunities to access funds that are not tied to an interest rate.
• Use forward contracts to lower the risk of exchange-rate differences if your business has foreign currency transactions
• Talk to your suppliers to assess their exposure and how you can work together to offset interest rate increases. For example, having contracts in place to fix supply prices can reduce your risk of rising costs.

Next steps

Rate the risk your business faces with rising interest rates (low, medium, high) and then take positive action to reduce the chance this current trend will have on you personally, and your business. Immediate steps can be to:

• Pay off any debt about to face higher interest costs with spare cash reserves.
• Get advice from your accountant or financial adviser on best ways to restructure your business.
• Investigate any local or federal government support you may be entitled to.
• Talk to us. We’re experts at helping you navigate the financial landscape.