Small businesses are the backbone of the Australian economy, and they face many challenges as they grow and develop. Rapidly rising interest rates are one of the most significant challenges they may encounter along the way. Although the impact varies, low interest rates are more favourable for businesses. This is because borrowing money to grow is cheaper, and it’s easier to plan to repay what you’ve borrowed.
Maintaining financial stability becomes difficult when interest rates climb faster than anyone predicts. For example, if your loan repayment interest rate suddenly doubles, you may have trouble repaying it. Unfortunately, this is a common problem because businesses that borrowed large sums of money during the good times, expect interest rates to remain low indefinitely (or for at least a few more years).
Understanding the impact of rising interest rates
When interest rates rise, businesses are negatively impacted in several ways. In addition to repayment commitments becoming more expensive, there are many other factors that contribute to the problem.
Less disposable income
As mortgage rates and business loans increase, people have less disposable income for non-essential items. The decrease in their spending creates a ripple effect across the economy and results in a decrease of sales.
Decreased investment in small business
Instead of investing in the stock market or spending, consumers turn to saving instead. As a result, deposits become more attractive, taking money out of the system. This means investment in small business decreases.
Difficulty accessing credit
Accessing credit also becomes more complex as lenders become more cautious. For example, you may need to provide more equity or personal guarantees to gain access to credit, which can be challenging if you don’t have significant assets.
The costs associated with running your business can also go up. Employee wages, supplies, and raw materials become more expensive. This makes it a challenge to maintain profitability, as we have seen with the construction industry in recent times. When interest rates change, you may struggle to know the cost of future borrowing or existing business loan rates. This makes it hard to plan your future finances and makes it difficult to know when to invest in new equipment or business growth.
Ultimately, rising interest rates make doing business more expensive across the board. Not only are your costs higher, but other businesses and individuals also feel the pinch, affecting the entire economy.
Solutions for small businesses facing financial challenges
Small businesses face many challenges in managing finances while staying profitable when interest rates are high. However, there are solutions that can help you navigate these challenges.
Reduce unnecessary purchases
When interest rates rise, delaying significant purchases or investments until they stabilise can be an effective option. Doing so will help reduce your debt load and provide financial stability in the long run. Paying only the interest on loans for a short while will also help reduce your monthly payments and make it easier to manage cash flow. However, there could be better strategies for managing your debt long-term.
Consider refinancing your loans
Refinancing your loans can also help reduce the overall interest rate while making monthly payments more manageable. Deleting credit cards will also help you avoid accumulating additional debt that’s difficult to pay off.
Tying your repayment schedule to known cash flow is essential when taking out new loans. It means you can ensure that monthly payments are manageable, and the business remains profitable. And as interest rates rise, it becomes more expensive to borrow money, so borrowing earlier can help save money in the long run, especially if there’s no end to increasing rates in sight.
Use forward contracts and lock in prices
Using forward contracts can also help you manage some of the risks associated with fluctuating interest rates. These contracts lock in a specific interest rate, providing stability and predictability. When interest rates rise, it's common for supply prices to increase as well. If you can, lock in prices with your suppliers before they rise. This may help you avoid sudden increases in costs for raw materials, which could impact your bottom line.
Pay off existing debt
By paying off debt before interest rates increase, you’ll avoid accumulating more debt and save money on interest payments. Focus on paying off debts with the highest interest rates first or consolidating multiple debts into a single loan with a lower interest rate.
Seek further financial advice
It makes sense to seek advice from your accountant or financial adviser for expert guidance on the most ideal ways to restructure your business, manage cash flow, and reduce expenses. They can also identify areas where you can cut costs or streamline operations, such as reducing overhead or renegotiating supplier contracts.
Find alternative ways of accessing finance
When costs rise unexpectedly, you may need extra cash to see yourself through. Historically, periods of inflation don’t last forever, so finding alternative ways to fund your business could be helpful in the short term. While traditional bank loans may become harder to access or have higher interest rates, other financing options may be more flexible or affordable.
Consider investors from outside your business
In some situations, a high-net-worth individual, or angel investor, will provide capital in exchange for equity in the business. This can be a good option for businesses in the early stages of development or with a unique product or service offering that is attractive to investors. Crowdfunding is another option where businesses can raise funds from many individuals online, typically in exchange for rewards or equity in the business.
For businesses that have strong personal connections or support, turning to friends and family can help. However, it's important to be transparent and professional in these arrangements, as personal relationships can be strained if things go wrong.
Seek grants and other government assistance
Government assistance includes grants, loans, or subsidies for specific industries or regions. Small Business Australia, opens in new window, for example, offer resources and support for small businesses facing financial challenges.
Considering outside funding doesn’t do anything to minimise your now-higher costs, but it can provide the boost you need to get through. Make sure you also find ways to make your business profitable again without the need to continually inject external cash.
Stay on top of your business finances
Ultimately, you need to constantly practice sound financial management so that you can respond when interest rates begin to rise. Monitor and manage your expenses and cash flow, regularly review your finances with your accountant or financial advisor and be ready to pivot your operations when times get tough.
When you’re proactive and continually seek guidance, you can navigate the challenges associated with rising interest rates and emerge stronger than ever before.
Other business moments
Get in touch
Visit our business banking contact page for how-to-guides and FAQs, as well as contact numbers.
Visit a NAB branch
Let our business banking specialists help you in person.
Terms and Conditions
Apologies but the Important Information section you are trying to view is not displaying properly at the moment. Please refresh the page or try again later.
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.