Act early, but don’t panic yet: How small businesses should respond to the first interest rate hike since 2010

After the first official cash rate hike since 2010, lending and credit experts say Australia’s small business community should recognise the potential impact of future interest rate increases — and take practical action if growing repayments threaten their business’ livelihood.

The Reserve Bank of Australia on Tuesday raised its cash rate target from a historically low 0.10% to 0.35%, ending a super-lax monetary policy position designed to stoke lending and spending through the COVID-19 downturn.

The big four banks have confirmed they will reflect the 25 basis point bump in their variable rate mortgage offerings, putting business lenders on alert.

For many business owners, Tuesday’s rate hike may be the first they’ve ever experienced first hand.

And with the banks counting $879 billion in lending to non-financial businesses in March — a $10.9 billion increase from February alone — increased interest rates could have a significant impact on firms nationwide.

Tuesday’s hike was just the start, so act early

At 0.35%, the cash rate target remains near all-time lows.

But the RBA has signaled hikes will come thick and fast through the rest of 2022, as the central bank works to wrestle runaway inflation back within its 2%-3% target band.

Neil Slonim, consultant, author, and former NAB regional executive, said businesses should recognise Tuesday’s increase, and bank interest rate hikes, as the first of many.

“When cash rates hit 3%, 4%, or 5%, which is distinctly possible in the next 12 months, that’s when it’s really going to start to hit small business owners,” he told SmartCompany.

While businesses which locked in vehicle or property leases at low rates may avoid the worst of future rate hikes, Slonim said businesses reliant on variable overdraft facilities could find their rates becoming more expensive in the months ahead.

For small businesses in tight positions, particularly those reliant on overdraft facilities, “it’s wise to act early to talk to the bank to get advice to consider alternative actions, which could include refinancing”, he says.

Banks will do due diligence, but appetite for lending remains strong

With interest rates set to increase over time, banks will remain focused on whether the borrowers they lend to actually have the means to repay their loans.

“I think small business owners can expect a greater level of scrutiny from their bank as to their profitability,” Slonim said.

That carries into what Slonim called ‘refinancing risk’, where potential borrowers have difficulty securing finance from a second provider.

“If your current bank says, ‘We’re not comfortable with the risk of carrying you anymore, and we think you should dabble elsewhere or we want more security, or we want to charge you more in that environment,’ it’s difficult for that small business owner to go to another bank and say, ‘Would you take me on, because my existing bank doesn’t want me anymore, or wants to charge me more, or wants more security, or wants to reduce my loan,'” he said.

But Scott Mason, general manager of commercial and property services at Equifax, shied away from a “doom and gloom” assessment of future business lending.

“I don’t think the changes will have a huge impact on that,” he told SmartCompany.

“Obviously, it’s an input into the way they evaluate risk and evaluate who they lend money to. So I don’t think the rise yesterday will have a huge impact on that. It’ll be input into their credit lending decisions.”

Keep an eye on consumer confidence

Where businesses could eventually feel the pinch, Mason says, was through declining consumer confidence and lower spending.

With rate hikes set to flow through to mortgage holders, homeowners may choose to service increased repayments by cutting back on discretionary expenses.

While Tuesday’s hike alone may not cause Australians to abandon their current spending routines, it’s “probably giving them pause to think about their spending habits”, he says.

“Again, I don’t think it will necessarily have an immediate, huge impact. But it’s more around if we saw interest rates continue to rise.

“I think fundamentally, it’s more about ‘Will be future increases?’ and how that will impact consumer confidence over time,” he added.

“But at the moment, I still think we’re coming out of COVID-19. So I think generally, what we’ve seen with business confidence, and what we’ve seen is business activity and the availability of credit, is still strong.”

Consider changing strategies — or selling off

If your business will feel the pinch of a 25 basis point hike, Slonim said it may be time to consider other ways to “solve the problem” with your lending provider.

“Can I raise equity? Can I sell assets? Can I sell part of my business?,” he said. “How can I reduce my debt to a level that a bank is going to be comfortable with?”

“If you’re struggling now, with a rate rise of 25 basis points, things are only going to get worse, and you need to pay for that.”