At the start of September 2022, the Reserve Bank of Australia (RBA) raised interest rates once again, pushing it to 2.35%. This marks the fifth consecutive increase since May 2022, making it the most rapid cash rate growth that Australians have seen since 1994.
While the decision to raise rates is never an easy one, the RBA believes that it’s necessary to keep inflation under control. Their goal is to keep inflation in the target range of 2-3%, and they remain confident that it will achieve this in the coming months.
But what does this mean for you and your business? Let’s take a look.
Understanding Interest Rate Rises
One of the RBA’s primary objectives is to ensure that inflation remains low and stable. It does this by setting the “cash rate”, which is the interest rate at which banks lend money to each other. When the cash rate goes up, it becomes more expensive for banks to lend money, and this usually leads to higher interest rates on loans for businesses and consumers.
The idea behind increasing the cash rate and making it more expensive for businesses and consumers to borrow money is to slow down economic activity and reduce inflation. The RBA sets the cash rate using “monetary policy”.
Monetary policy can be either expansionary or contractionary. Expansionary policy is used to stimulate economic growth and involves lowering interest rates, while contractionary policy is used to slow the economy down and involves increasing interest rates.
The RBA has a target inflation rate of 2-3% over the course of the economic cycle. This target is used as a guide for setting monetary policy with the goal of maintaining price stability. If inflation is running above the upper end of the target range, it may be an indication that the RBA will raise interest rates in order to slow down the economy and bring inflation back under control.
On the other hand, if inflation is below the lower end of the target range and other economic indicators such as growth and employment are weak, this could signal that the RBA will cut interest rates in order to stimulate economic activity.
The current inflation rate is 6.1%, and it is predicted to peak later on in 2022. This means that business owners should prepare for further interest rate increases until 2024, when inflation is expected to start declining to the optimal range.
How Is the Interest Rate Rise Going to Impact Your Business?
Businesses enjoyed record low borrowing rates throughout 2021 thanks to the low cash rate set by the RBA, which essentially enabled them to fund their business relatively cheaply. So, most businesses currently have outstanding loans. And with interest rates starting to rise, loan repayments are going to become more expensive for businesses.
Beyond that, rising prices and interest rates can have a significant impact on operations. Higher borrowing costs make it more difficult to expand or make improvements. Inflationary pressures have led to an increase in the minimum wage, which in turn can cause businesses to raise prices in order to keep up with rising costs. This increase in price, coupled with consumers’ cutting back on their spending, could also mean lower sales and reduced profits.
So, what can you do to prepare and stay afloat?
Speak to a mortgage broker and accountant to review your existing debt
Since you are reading this article, it is likely that you have received the dreaded email or notification that the interest on the existing loan is due for an increase.
Speak to a mortgage broker to discuss whether there are other loan products that you could refinance into to reduce interest rates. Part of the discussion with your broker may include repayment options, cash flow, loan features, offset accounts and more. If you do not have a reliable mortgage broker, ask your accountant to refer you to one. Speaking to a mortgage broker alongside an accountant could help you allocate your funds to the right places, to reduce interest expenses as well as minimise your taxes.
Reassess your Business Expenses
With interest rates on the rise and inflation expected to hit its peak, now is a good time to take a closer look at your business expenses and see where you can save.
There are a number of ways to reduce expenses, and it’s important to evaluate all options in order to find the best solution for your business. One way to reduce expenses is to check if you’re getting the best deal on essential services like:
- insurance premiums;
- phone bills; and
- internet services.
It’s also important to consider whether you can negotiate a rent discount with your landlord. In addition, outsourcing non-core business activities can often be a more cost-effective solution than maintaining an in-house staff.
If you can evaluate your profit and loss statement and identify where you’re spending the most, you can find creative ways to reduce business expenses and improve your bottom line.
Update your Pricing Model
Many businesses find themselves in a tight spot when it comes to profitability. Margins are often slim, and it can be difficult to find ways to increase revenue without jeopardising sales. But there’s no doubt that one of the quickest and easiest ways to improve your bottom line is to increase your prices.
This may seem like a counterintuitive approach, but consumers are becoming increasingly accustomed to price increases because inflation is essentially impacting prices across the board. So, businesses that adjust their prices accordingly are likely to find that consumers are willing to accept the changes.
Remember that even a small price increase can have a significant impact on your margins and profitability.
Speak to your Business Accountant
If you’re worried about how the recent rate hikes will impact your bottom line, it’s a good idea to speak with your business tax accountant. They can help you assess your current financial situation and develop a plan to navigate the interest rate increases.
Interest rate rises from the RBA can have a significant impact on businesses, making it more expensive to borrow money and limiting access to credit. There are, however, some things that business owners can do to mitigate the effects, such as shopping around for a competitive loan rate and cutting back on expenses where possible.
If you’re concerned about how rising interest rates may impact your business, we strongly advise that you speak to an accountant or financial advisor for a tailored solution to help you navigate the continued increases.
The Box Advisory Services team has a wealth of experience helping businesses navigate through tough times. We can help you review your current financial situation and make recommendations on how to best weather the storm. For example, we can help you review your debt levels and make sure you are prepared for higher interest rates.
We can also help you review your cash flow and make sure you have enough liquidity to weather the storm. In addition, we can help you develop a financial plan to ensure you are able to meet your obligations during this difficult time.
Contact us today to learn more about how we can help your business.