At its latest meeting in July, the RBA decided to leave the cash rate at 1.50%. However, interest rates are currently at historically low levels and expectations are that interest rates will begin to rise in the near-term.
“The Reserve Bank, though, warned that its current estimate of the so-called neutral rate could rise back closer to previous levels, which were 1.5 percentage points higher prior to the global financial crisis.” (Source)
The timing of when interest rates may rise is not clear and dependent on many factors. However, the speed that interest rates rise could take some business owners by surprise if past experience is any guide:
“Like loosening episodes, tightening episodes appear to accumulate tactically but are in retrospect strategic. Nor are they necessarily gentle, or gradual. As governor, Ian Macfarlane took the rate from 4.75% in October 1999 to 6.25% in August the following year. Macfarlane and then his successor as Governor, Glenn Stevens, took only two years to move from 5.5% in April 2006 to 7.25%. Stevens later took just over a year to go from 3% in August 2009 to 4.75%.” (Source)
Should interest rates rise 1.5%-2.0%, that will mean that today’s standard secured small business overdraft rate of 7.3% will be closer to 10%. While the cost of borrowing money for businesses will obviously increase, Forbes has identified four key business issues that owners should be considering:
• Receivables – The cost of carrying credit for customers may increase. It may be time to reconsider the receivables pricing policy.
• Sales – How might a change in interest rates affect sales?
• Purchases –Consider whether it would be beneficial to change the purchasing strategy?
• Marketing – Consider how you can build this into your marketing plan.
Consequently, now is the time for astute business owners to start planning for how their business will operate in a higher interest rate environment. Maddock’s Accounting & Advisory can assist business owners with assessing the impact that higher interest rates may have on their business and take steps to ensure the business is able to continue to succeed as conditions change.
Contact the Maddock’s Accounting & Advisory team here to find out how we can help.
“The expected outcome is a general increase in interest rates. How much will they increase; will it have more effect on long or short term rates; and, how fast will it happen? All good questions, but ones without answers. Further, interest rates don’t work in a vacuum. Other economic and market conditions can offset the effect of an interest rate increase. All a business owner can do is seek good advice and begin to prepare for an increase in interest rates. An increase in interest rates can have a variety of business consequences that may affect your operations, including:
Receivables – Your cost of carrying credit for your customers may increase. It may be time to reconsider your receivables pricing policy.
Sales – How might a change in interest rates affect your sales? You may actually experience an increase in sales as customers try to access credit while it is still comparatively inexpensive. This may be particularly noticeable with capital purchases this year, as companies seek to access cheap credit AND utilize the current higher expensing rules under IRC 179. On the flip side, increased borrowing costs may cause a longer term slowing of purchases. More costs, less buying. This is an opportunity for you to consider a pricing strategy aimed at timing an anticipated change in rates.
Purchases – For the same reason your customers may change their buying habits, consider your own purchasing strategy. Is now the time to consider capital purchases or buying a large supply of goods needed for your manufacturing? Or, should you consider a cutback on purchases to reflect an anticipated dry spell in profits?
Marketing – The fact I’m being asked about interest rates is an indicator that this is an issue both on business owners’ and consumers’ minds. If you believe interest rates are on the rise, consider how you can build this into your marketing plan. Perhaps you should target customers who are most likely to be affected by this change. A “fire sale” approach for some; an easy credit approach for others.
There is no ready-mix approach to anticipating a change in interest rates. With all change though, it is likely to affect your business, so you might as well start planning for it now.”
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