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With recent focus on world events, many small- and medium-sized businesses in Australia are left wondering what these distant, foreign developments mean to their business operations at home.

We’ve seen riots in Bangkok that have left 33 dead, riots breaking out in Greece over the country’s debt problems which will require a bail-out from the International Monetary Fund, the drop of over 1000 points in the Dow Jones due to the ‘fat finger’ of a single errant trader, and a massive oil spill off the U.S Gulf Coast that has thrown the oil markets into chaos due to uncertainty over the future of offshore oil exploration.

These world events can greatly affect the operations, and cashflow, of Australian businesses.

Unfortunately, they will result in higher borrowing costs for SMEs that use bank loans, credit cards or other forms of finance tied to interest rate levels.  The reason is due to the ‘credit spreads’ in overseas money markets.

Our Australian banks are in great financial shape, however, because the demand for money from Australian consumers (for mortgages) and businesses (corporate lending) is greater than the domestic supply of funds (i.e. deposits collected from individuals and businesses), the Australian banks need to raise what is called ‘wholesale funding’ to bridge the gap.

This ‘wholesale funding’ is primarily obtained from overseas institutions and the rate that the banks will pay to borrow this money is driven by ‘credit spreads’ – essentially, the margin over and above the prevailing interest rate.  As we saw during the depths of the GFC, when there is uncertainty in the global economy, these credit spreads will increase to account for the perceived increase in risk.  This is the likely outcome as a result of these recent events in Europe, Asia, and the US.

As credit spreads increase, the cost of borrowing to the bank increases and these costs will be passed onto the consumer, whether they be personal or business borrowers.

Here are some tips for small business owners to help cope with the bank increases:

1. Know your position with respect to funding costs.

If you have a bank loan and it’s a ‘variable’ interest rate facility, project the cost of using that loan if rates increase 1 full percentage point (or, 100 basis points in bank language), and remember that your funding costs can increase even if the RBA does not continue increasing rates due to this dynamic of wholesale funding credit spreads.

2. Understand what alternatives you have in terms of sources of working capital finance.

There are a wide range of alternative finance companies that provide ‘debtor finance’ using a range of products that might suit your business even if you still have a bank lending facility in place.

3. Ask your existing or prospective finance provider about what impacts your borrowing costs.

As about the cash rate, discretionary changes by the financier, etc. Some of the providers in the market don’t link their pricing directly to interest rates and credit spreads so this is important to understand.

This way, when the next ‘black swan’ strikes, you won’t end up like the proverbial Ostrich, with your head buried deep in the sand (and your interest rates heading sky high).

David Hechter is the Chief Operating Officer of the Interface Financial Group, a franchise system offering invoice discounting services (www.ifgnetwork.com.au). David has also held senior positions at Perpetual Ltd and St George.

Photo: B Rosen