On Tuesday the Reserve Bank lifted the cash rate target by 0.25 percentage points to 4.85%. If you run a business, you’ve probably already done the quick sum in your head: what does this do to my loan repayments?
That’s the right first question. It isn’t the only one. Here’s what I’m telling clients this week, and the one decision I’d make before the Reserve Bank meets again.
The direct cost: your loans
Business loans, overdrafts and equipment finance on variable rates will move when your lender passes the rise on. As a rough guide, each 0.25 point rise adds about $250 a year in interest for every $100,000 of variable debt, if the full rise is passed on. On a $500,000 facility that’s around $1,250 a year, or a little over $100 a month.
On its own, that won’t sink a healthy business. But it rarely arrives on its own. So start with the facts, not the estimate: when does the new rate apply to each facility, what will the repayment become, and is any loan or overdraft due for review or renewal in the next 12 months? A renewal in a tighter market is a conversation to prepare for, not one to walk into cold.
The indirect cost: your customers have less to spend
Your customers have mortgages and loans too. When their repayments go up, the money left over for everything else shrinks. The Reserve Bank said as much in its statement: “Higher interest rates and falls in housing prices and turnover are expected to weigh on growth in dwelling investment and household consumption.”
If you sell to households, whether you run a shop, a café, a trade business or a service, that tends to show up as fewer extras, smaller orders and more people shopping on price. If you sell to other businesses, it usually reaches you a step later, as your customers tighten their own belts.
The quiet cost: confidence
Rate rises change behaviour before they change the numbers. Customers delay decisions. Jobs get “pushed to the new year”. Suppliers get more careful about credit. And owners, understandably, start making calls from the headlines rather than from their own figures.
The Reserve Bank’s own words were plain: “The economy is slowing, housing prices have fallen significantly and the unemployment rate has risen.” That isn’t a reason to panic. It is a reason to know exactly where you stand.
Where I’d put your attention: the cash forecast
If you do one thing this week, re-run your cash flow forecast for the next 13 weeks. Not the budget you set in July. A fresh one, built on three honest assumptions:
- Your loan repayments at the new rate.
- Sales a little softer than you’d hoped.
- Customers paying a week or two later than they do now.
Then look for the low point: the week when the bank balance is at its lowest. If that point sits comfortably above zero, or comfortably inside your overdraft limit, you can get on with running the business. If it doesn’t, you’ve found out in November rather than in February, and you have time to do something about it: hold a purchase, stage a hire, talk to your lender early, or bring some cash in sooner.
And your debtors
In a tighter market, money owed to you is the first place cash goes missing. When customers feel squeezed, suppliers get paid last. A few habits make a real difference:
- Invoice on the day the work is done, not at the end of the month.
- Check your payment terms are written down and on every invoice.
- Follow up on the first day an invoice is overdue, politely and every time.
- Know your ten biggest debtors and how long each one is taking to pay.
- On larger jobs, ask for a deposit or bill in stages.
None of this is new. What changes when rates rise is the cost of not doing it.
The decision you can make this week
I’m not suggesting you freeze spending or pull back from every plan. I’m suggesting you decide from your numbers, not the news. Sit down with this month’s figures and answer three questions:
- What do our loans now cost us each month?
- How many weeks of cash do we have at the lowest point in the next quarter?
- Who owes us money, and how long have they had it?
If you can answer those, the next rate decision, up, down or steady, becomes something you plan for rather than something that happens to you.
If you’d like a second pair of eyes on your forecast before the next rate decision, visit cyrepartners.com.au and get in touch →
— Matthew Sweeney, Chief Adviser and Strategist
Cyre Partners — Empowering Smarter Business Choices.