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Interest rates and small business pain


With recent interest rate rises, much talk has centred on how the increases are likely to affect families and mortgage repayments. However, the impact on small business owners and their cashflow shouldn’t be ignored.

Unfortunately, small business owners may feel a disproportionate amount of the pain from interest rate rises. While there’s a great deal of political pressure on the banks to only pass along rate rises to home loan borrowers in line with the Reserve Bank’s movements, the banks have been vocal about their own funding costs rising beyond the RBA’s increases.

So, be warned: given that small business is a less politically sensitive group, it’s likely that higher increases will be passed on to small business borrowers – either via loans, credit cards or overdrafts – in order to compensate for these costs.

This will leave many small businesses struggling to make repayments and balance the cashflow requirements for their working capital.

In order to prepare for these anticipated increases, small business owners need to look at their finances in advance and see what impact even a small increase will have on their operating costs and bottom line.

If you’re a small business owner, the first thing you should do is calculate the projected increase in funding costs from not just one rate rise but a few. Use a scenario where the interest costs increase by one percentage point (100 basis points) and see what impact this has. Ask yourself how an increase is likely to affect your bottom line, and how it would impact on your cashflow.

It’s also important that you know your funding limits. Part of effectively managing your cashflow is to ensure there is enough capacity in the funding lines available to run your business efficiently and without interruption. Small businesses can often grow beyond traditional funding lines, which can be capped based on credit limits set by the collateral that the small business owner has put up as security.

Also take time to review your options. If traditional lines of credit, business loans or credit cards are not providing your business with the flexibility you need to operate effectively, then consider other options such as receivables or invoice finance. Small businesses often overlook one of the major assets they have: the strong customer base of credit-worthy companies that are on their Receivables ledger.

Invoice factoring can provide small businesses with short-term working capital funding in the form of invoice discounting. It’s a form of commercial financing or debt financing that has collateral as a basis for borrowing money. Basically, a factoring company makes arrangements to purchase a company’s invoice in exchange for immediate payment to ensure the business’s operations can continue uninterrupted.

It’s important to remember that while interest rate increases can place an extra burden on small business owners, a little advanced planning will at least prepare you for what a rise might mean for your business.

David Hechter is the Chief Operating Office of The Interface Financial Group in Australia. IFG is the largest alternative funding source for small business in New Zealand and North America, and provides short-term working capital funding in the form of an Invoice Discounting service.