Across the world nations are grappling with the onset of runaway inflation, the strongest witnessed in decades. Central banks caught behind the curve are springing into action as we saw the RBA calling time on historic low-interest rates earlier this week, raising the official cash rate by 0.25%, a move not seen since November 2010. In the United States, the story is no different with the Federal Reserve also announcing a 0.5% rate hike, its biggest in two decades.
Rising expenses on all fronts
For Australia, the significance of this rate increase, which comes in the middle of a federal election, cannot be overstated. From transportation to energy and materials, the cost of everything is going up.
Data released by the Australian Bureau of Statistics revealed that 39 per cent of all Australian businesses expect to increase their prices more than usual, and that 57 per cent had their operating expenses increase over the previous month.
Unfortunately, a rate rising environment will, at least in the short-to-medium term, only exacerbate these challenges as SME financing becomes more expensive as well.
SMEs rely heavily on debt financing for a range of business purposes. In fact, according to the Productivity Commission, 15 per cent of all Australian SMEs applied for some sort of debt financing in 2018-19 compared with just 5% which applied for equity financing.
The most common reason for this financing was for the management of short-term cash flows and as business lending rates start to move higher, overly leveraged businesses may start to find themselves under increasing pressure to meet supplier payments and debt obligations.
Weakening consumer demand
With Australia’s major lenders having all but confirmed they will pass on the RBA’s rate rise in full to mortgagors, repayments on these loans will also be higher, adding further pressure onto households. This will undoubtedly limit discretionary spending which will of course impact SMEs and the business sector more broadly.
Understanding your options
Whether it’s equipment financing, lines of credit, trade finance or overdraft facilities, if your business is heavily reliant on debt financing, then you may want to consider moving quickly to explore what options are available. From refinancing to locking in a fixed rate, it’s important to shop around and look for the best rates on offer.
Additionally, you may want to think about selling any non-essential business assets you have at your disposal to free up spare capital. Alternatively, you could even consider restructuring some of your business including selling equity.
Keep calm
When headwinds begin to strengthen, it’s important to keep a level head. There are many options available to SMEs which can support Directors through tough periods. From cutting back on non-essential services, to reviewing business operations and continuity plans, keeping sight of the bigger picture is the most important thing to do.
How Falanga & Co can help
We are here to provide you with a clear oversight of your business. This could include restructuring, asset protection, cost reduction, and cash flow forecasts. We want to help you safeguard and strengthen your business’ full potential in good and challenging times.
Please get in touch today if you have questions or concerns about how your business might be impacted.
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