When it comes to interest rates, small businesses have had a rough time lately. They’ve had to cope with tough lending conditions from the big banks and now another interest rate rise.
When interest rates rise, small business gets squeezed at both ends. On one hand they face paying more interest on their borrowings, reducing their profitability and putting pressure on spending. On the other, they face a potential for customers and clients to reduce spending which effects revenue in their business.
There is a number of ways a business can mitigate the risk associated with interest rate rises:
- Repay the debt using available funds
- Consider fixing the interest rate on loans
- Ensure the business has a strong finance function and cash flow is monitored closely
- Foster a good relationship with your bank manager and ensure they have a sound knowledge of your business and its positive aspects. This will also limit the chance they will make a call on your current loans.
Compounding the effect that rising interest rates have on small businesses has been the decrease in business lending from the big banks which made it difficult for small businesses to obtain bank loans. However, from what I see this trend seems to be lifting somewhat, particularly for businesses that have made themselves an attractive choice.
There are a number of ways you can make your business attractive to a bank. These include having your paperwork in order. Make sure you have accurate and up-to-date figures and you have a detailed business plan. Also ensure you shop around and talk to multiple banks this way you can make sure you get the loan that best suits your business.
However, banks aren’t the only source of capital available to small businesses. Other options may include:
- Leasing is a good option for obtaining necessary equipment without outlaying large amounts of capital and therefore frees up cash
- Debtor financing is still a viable option even though many of the big banks have stopped offering it. Debtor financing allows business to quickly access up to 90 per cent of the value of their outstanding invoices and if used accordingly can assist in keeping the business’ cash flow healthy
- Capital raising can also be a funding alternative. As the stock and property markets have been quite turbulent, there are angel investors willing to consider investing in small business ventures.
