Changing Interest Rates and the Impact on Your Business

May 19, 2023

The ongoing increase in cost of living, and continual interest rate rises, is being felt by all Australians.

While everyday items go up, so too does the cost of borrowing money, which can impact us personally and professionally. In addition to what we can borrow for home loans, business loans are also hit with the same increases.

This means business owners and the decisions they make in how to launch, grow, or develop their enterprise may be impacted. 

How do rising interest rates impact my small business?

As of April 2023, Australians have seen 10 consecutive interest rate rises. The impact of this is significant in that with each rise the amount a person or business can borrow drops, sometimes by thousands of dollars with every rate rise. 

Smart small business owners understand the impact of changing economic conditions and take proactive steps to manage their financial risks. It is essential to assess the current market conditions before taking on new loans or increasing existing ones. 

As interest rates continue to rise, there is a noticeable impact on the borrowing capacity of both individuals and businesses. However, by carefully managing your finances and prioritising your expenditures, it is still possible to operate a successful small business in a rising interest rate environment. 

There are several strategies that businesses can use to survive and even thrive during periods of high interest rates: 

1. Refinance existing debt: Businesses can try to refinance their existing debt at a lower interest rate to reduce their interest expenses. Your broker can help you negotiate the lowest possible interest rate.
2. Focus on high-margin products: During times of high interest rates, businesses can focus on high-margin products to increase their profitability. 
3. Increase efficiency: Businesses can improve their efficiency with technology, cutting costs, increasing productivity, and streamlining operations.
4. Invest in fixed assets: High interest rates may make it more expensive to borrow money to invest in fixed assets, but it can also make those assets more valuable. Companies can invest in assets that will generate cash flow in the long term, such as real estate, equipment, or technology.
5. Diversify revenue streams: Businesses can diversify their revenue streams by expanding into new markets or offering new products or services. This can help them to reduce their reliance on any one market or product.
6. Monitor cash flow: It’s important for businesses to closely monitor their cash flow during times of high interest rates. They should be prepared to adjust their spending and investment plans to ensure they have enough cash on hand to meet their obligations.

While there may be some challenges associated with rising interest rates, it is important to remain optimistic and continue exploring new opportunities. As always, working with an experienced financial broker can help you navigate any obstacles and position your small business for long-term success. 

How could a drop in interest rates help my business?

A drop in interest rates can be positive for businesses. The Reserve Bank of Australia’s decision to pause interest rates this month, April 2023, has led to speculation that we may see a decrease in interest rates in the second half of the year. 

Lowering interest rates can have a significant impact on borrowing behaviour. It can make borrowing money more affordable, leading to an increase in the number of loans taken out by business owners and home buyers. This increase in borrowing can also result in an increase in the amount people are willing and able to borrow. 

 A drop in interest rates could help your business in several ways: 

1. Lower borrowing costs: If your business needs to borrow money to finance operations or invest in new projects, a drop in interest rates could mean lower borrowing costs. This could make it easier to obtain financing or refinance existing debt at a lower interest rate, which could reduce monthly payments and improve cash flow.
2. Increased consumer spending: Lower interest rates can encourage consumers to spend more money. This could lead to increased demand for your products or services.
3. Economic stimulus: Lower interest rates can help stimulate economic growth as businesses invest in new projects and consumers spend more money. This could create new opportunities for growth and expansion.

Business growth and expansion needs investment

Your broker has the knowledge and experience to help you navigate interest rates and find the best deals available. They can help you understand the factors that are impacting the market, and advise you on the best time to borrow money for your business. By working with a broker, you can ensure that you are able to achieve your goals for 2023. 

This information is for general information purposes only. The information contained herein does not constitute financial or professional advice or a recommendation. It has not been prepared with reference to your financial circumstances or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice as to whether or not this information is appropriate for you.