Cash rate changes: How businesses are responding
At a glance
- The Reserve Bank Board announced the first increase of the target cash rate in more than a decade on Tuesday 3 May – from 0.1% to 0.35%.
- We spoke with Australian businesses in the lead up to the announcement to find out how they were preparing – by controlling costs, forecasting cash flow and ensuring any debt is aligned to goals and revenue.
- Prior to the RBA announcement, 70% of small businesses had already made or started to make substantial changes that would help them remain operational in an environment of high inflation, labour shortages and supply chain disruption.
What is the RBA cash rate target?
The cash rate is the rate of interest charged on loans made between financial institutions. As this rate changes, financial institutions often pass on those fluctuations to their customers via changes to loan interest rates. The target for the cash rate is set by the Reserve Bank of Australia (RBA) each month and had been, until 3 May, at an all-time low of 0.1 per cent since November 2020. It had already been on a downward trajectory prior to the pandemic, and hadn’t increased since 2010 – more than a decade ago.
On 3 May 2022, the RBA raised the cash rate target to 0.35%, citing high inflation, low unemployment and an expectation that wages will continue the upwards trajectory reported in the ABS Wage Price Index for the quarter that ended December 2021.
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How does the cash rate affect interest rates?
When the cash rate increases, this usually means that financial institutions are paying higher interest on the money they borrow, so they often pass those higher costs on to their customers by increasing the interest rates their customers pay on loans. While a variable interest rate will often vary depending on changes to the cash rate, a fixed interest rate will not. So taking on a fixed-rate loan means you are not adversely affected by higher rates even when the cash rate goes up.
Prospa’s fixed-cost loan
Some lenders – including Prospa – take ‘fixed interest’ a step further. Prospa’s fixed-cost approach means the amount of the loan isn’t affected by changes to the cash rate, or by anything else throughout the loan term.
“When you apply for a loan, all you really want to find out is: ‘What will this cost me?’,” says Beau Bertoli, Co-founder and Chief Revenue Officer at Prospa. “Our fixed-cost small business loans provide business owners with much needed clarity on the overall costs, and certainty for the duration of the loan.
“We prioritise transparency to make it easier for small business owners to manage the ups and downs of running their businesses and enable them to optimise their cash flow and forecasting.”
How businesses respond to change
The financial adviser
Small businesses are likely to see some impact on their margins – as a result of both increased interest rates on their own debts and suppliers passing on higher operational costs. Some business owners who anticipated changes to the cash rate began early to prepare for this and are moving their own prices higher.
According to Kristopher Meuwissen, director and founder of Wealtheon Financial Services, it’s important to be familiar with your business’s cash flow forecast and align the interest rate attached to your loan with your cash flow needs.
“Fixed rates are extraordinarily advantageous in terms of knowing cash flow and understanding exactly what your interest payments will be,” he says. “It removes the question of rising or falling rates affecting your cash flow.”
Kristopher also suggests a risk analysis for financing, saying that if a small business is making a purchase that could double revenue in the coming 12 months, and if they can take on the debt, a slightly higher interest rate may be acceptable.
The B2C green-energy business
Daniel Jarrett, director of Queensland Solar and Lighting, says that while changes in the market aren’t likely to drive his business’s turnover down, they will impact his margins.
“While times like these are good for businesses such as ours, we are in the business of saving people money,” he says. “And as a business we must adopt the mindset of the customers we are selling to,” he says.
Daniel’s business takes care to control costs in the higher-interest environment, while Kristopher recommends cash flow forecasting and aligning borrowing with business need and return on investment.
Ahead of the RBA announcement, we partnered with YouGov* to ask more than 500 Australian business owners and leaders about the actions they are taking to protect and grow their businesses in the current environment – which was one of high inflation, labour shortages, supply chain disruption and the likelihood of interest rate increases.
Confidence was high, with 70% rating their business as healthy and only 10% anticipating a revenue drop in the coming 12 months. Still, a great majority, 70%, told us they have made or started to make substantial changes.
These changes include price rises, with majority of those increases between 10% and 20%.
Other measures include scaling up marketing activities (22% of those surveyed), , contributing extra funds personally to the business (19%), or reducing operating hours (15%).
*The State of Australian Small Business 2022: Confidence, Recovery and Growth, YouGov, 2022.
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