How rising interest rates will impact your business

By Richard Holdcroft – journalist

The era of cheap money is over, and businesses large and small will now need to pay much closer attention to their cost of capital going forward.

Australia’s last rate rise before May 2022 was in 2010, and today an entire generation of younger entrepreneurs have little experience of managing a business in an environment of rising interest rates. But those who’ve been around a little longer remember when times were very different, and the official Reserve Bank of Australia (RBA) cash rate peaked at a punishing 17.5 per cent in 1990.

While no one is currently anticipating a repeat of the ’90s, with RBA governor Philip Lowe predicting that inflation may reach as high as 7% this year, the bank is likely to become more aggressive in terms of raising the cash rate during 2022 and 2023.

This will prove a challenging time for many small businesses, especially those on thin margins for whom a significant increase in interest bills could mean the difference between profit and loss. They will have to learn to deal with higher costs, either by passing them on to customers or cutting back on expenses.

Fortunately, there are some steps that you can take as an SME owner or manager to mitigate the effects of rising interest rates. For example, finance options that provide more flexibility could enable you to take better control of your overall interest bill.

Finance is the lifeblood of any business, but in decades past, SMEs were somewhat restricted as to the types of financing they could acquire. Term loans and overdrafts from traditional financial institutions were the norm until fairly recently, and while those can still make sense for some businesses, there are now plenty of other options to choose from that could help to significantly reduce your cost of borrowing over time.

These days, SMEs are increasingly turning to innovative and customer-focused non-bank lenders, who are providing a much wider range of tailored finance products designed to meet their specific needs and goals. These include Invoice Finance and Trade Finance, among many others.

While rates on these types of financing may increase too, they can prove to be better solutions for many businesses because of the added flexibility they offer. Indeed, the latest SME Growth Index compiled by ScotPac, Australia’s leading non-bank business lender, found that the number of SMEs planning to borrow from non-bank lenders has doubled in just four years.

Invoice Finance

Invoice finance is a way for businesses to speed up their cash flow by unlocking funds currently tied up in outstanding invoices. By borrowing against the amounts due from customers, you can turn these into a source of readily available funding with no property required as security, providing an immediate cash injection to cover new opportunities, or to meet costs such as wages and suppliers.

Facility limits can range from $10,000 to over $100 million to support every business size. And interest is only incurred on the amount advanced and until the invoice is paid, as opposed to ongoing monthly interest payments on long-term business loans.

Trade Finance

Trade Finance provides businesses with fast funding for specific consignments of stock, inventory and raw materials, so you don’t have to turn away new orders due to a shortage of cash. It works like a revolving line of credit to pay your overseas or local suppliers when you need to. This allows you to maintain working capital rather than having funds tied up while goods and materials are produced and shipped, or to negotiate bulk buying/early payment discounts with your suppliers.

Like Invoice Finance, Trade Finance provides tailored borrowings that only cost your business interest for the time they are needed.

In 2022, there are now a wide range of finance solutions specifically geared towards improving cash flow and generating the funds that businesses need to realise their goals. Whether your SME is a start-up, an established business looking to grow, or you need a cash injection to get your business back on track, it’s well worth your while to explore the many finance options available today.

Let’s discuss the best finance option for your small business.

Feel free to contact us for anything that relates to your business finances so we can help with your success.

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