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What rising interest rates mean for Australian SMEs: The best time to plan was yesterday – the next best time, is now

Economic updates By Duncan Khoury – 20 July 2022
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In the last few months, the Reserve Bank of Australia has been on a mission to keep inflation under control with interest rate rises. In early July, it announced another rate hike of 50 basis points, taking the cash rate to 1.35%, citing the need to curb inflation as a key driving factor.  The next RBA Board meeting and Official Cash Rate announcement will be on the 2nd August 2022.

Quite clearly there is nothing to suggest that the slew of interest rates announcements will calm down any time soon. Treasurer Jim Chalmers has warned the cash rate will keep rising, potentially hitting 2.5% by Christmas – heaping additional mortgage pressure on millions of Aussie households whose monthly budgets are already strained.

These are the biggest cash rate surges in over 22 years, and many Australian businesses, much like homeowners, will have little to no experience of how rising interest rates will impact their outstanding bank and other loans.

For businesses with existing debts, rising interest rates essentially mean bigger repayments and less free cash to spend on inventory or business expansion. Customer’ borrowing capacity will reduce significantly, dampening demand in some areas. In turn, as costs increase, businesses will often have to pass this onto customers in the form of higher prices. This creates a spiralling cycle of inflation that will make it more expensive for businesses to secure stock and harder to sell goods.

Given that inflation won’t be easing any time soon, your clients may well be struggling to access the same funds they were able to only 6-12 months ago. Rather than helplessly watching the business’ working capital position suffer, you could be in a position to help them manage their cash flow issues with products that are outside of the usual service you provide. You should see this as an opportunity to support growing business owners who have profitable operations but need a helping hand to fulfil their potential. This includes offering reputable non-banking options as an alternative to traditional asset-secured finance.

Here are some items that accountants and other financial advisers should be considering to keep their SME clients across during the current economic conditions.

Tailor your advice to the unique conditions

In a time of great uncertainty, many SME leaders won’t have the know-how to react quickly to new financial crises. Financial advisers can therefore offer their valuable knowledge by running “what-if” scenarios to test various potential impacts of inflation, with a view to creating an effective ‘cash flow runway’ for ‘just-in-case’ situations. This is essential in maintaining a solid balance between growth, profitability, and liquidity.

Improving the efficiency of accounts receivable and accounts payable processes will also be vital to ensuring steady cash flow. Accountants particularly can help their clients keep an eye on metrics like expenses, past-due invoices and operating cash flow. Generating and tracking cash reports daily can help business leaders plan for the future, but they’ll need to lean on their accounting and other specialists to make truly informed decisions.

At a high-level, SMEs will likely also have to find a balance between increasing prices for their products or cutting costs in their companies. Some of the key questions that financial advisers can help their clients with include:

  • Should the client be implementing strategic pricing increases (over a given time period) so that their business isn’t absorbing all of the higher costs of materials and goods, while reducing wastage in an economy that’s becoming increasingly expensive? How will any impacts on customer retention be measured?
  • Consider ‘trimming the fat’ in your business and ask the hard questions: Do we need to hire more staff? Can we afford to enter new markets or product categories? Do we need to cut down on inventory levels, or is the risk too big, given global supply chain delays?

Find smarter forms of finance that exploit growth opportunities

Given that traditional banks will now be more reluctant to lend and likely to set more stringent terms, satisfaction and in turn, trust may dwindle. In these conditions, SMEs often lean on their accountants and other business advisers for guidance around alternative finance options regarding the procurement of goods from Asia or a local business acquisition or expansion of some variety.

One alternative working capital solution for these procurement and growth type business objectives is Trade Finance, which provides a flexible line of credit to pay local and international suppliers immediately, while the financier is repaid over an extended period of time (often with an initial interest-free period). This guarantees that the business doesn’t miss out on any available sales and discounts due to not being able to afford to buy stock or is unable to take advantage of other time sensitive business opportunities.

However, as non-bank lending is still a somewhat unregulated market, it is often difficult for the uninitiated to access and assess the quality of a lender. SMEs will be depending on their accountants and other financial advisers to connect them with reputable non-bank lenders that proactively meet the responsible lending laws overseen by the ASIC.

The landscape for business financing is ever-changing. But the economic path forward in 2022 has already been somewhat laid out in the ongoing announcements by the Reserve Bank, and via the rapidly increasing inflation figures. It’s not too late to effectively plan for the next six months, when we are almost certain to experience more interest rate increases. With the cost of doing business on the rise, it’ll pay to create a cash flow runway and at least be aware of all available finance options, particularly those that consider the strength of your balance sheet in assessing funding, as opposed to strictly personal property secured lines of credit.

So, whether your clients want to start importing from India or understand how to better pay local and international suppliers, Octet can help.

Get in touch with one of our supply chain finance specialists today to discover how we can power your business to help your clients through the current economic climate.


Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.

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