The world has changed a lot since the global financial crisis of 2008, but one thing has remained constant: record low interest rates. No matter what turbulence they faced, Australian businesses could rely on the fact that borrowing remained cheap.
Now, we are finally coming to the end of the cheap lending cycle. Inflation is rising globally, spurred by pandemic-induced supply chain shortages, rising commodity prices, including oil and gas, thanks to Russia’s recent invasion of Ukraine.
In the US, inflation hit 7.9 per cent in March, causing the Federal Reserve to raise rates for the first time since 2018. This has, rightly, put Aussie businesses on notice to expect a rise in interest rates, with Commonwealth Bank already tipping that cash rates will increase in June.
While Australia is far behind the US on inflation, pressure will likely increase. The RBA expects underlying inflation to rise to 4.75 per cent, while the Consumer Price Index (CPI) has already risen to 5.1 per cent annually. Just this week the RBA has increased the cash rate target by 25 basis points, which was swiftly passed on by the major banks, despite there being some abnormal economic factors caused by COVID over the last two years..
But what does all this mean for small businesses? Many business owners, particularly those running high-growth, eCommerce companies, will be focused on supply chain issues that will negatively impact their ability to secure stock, which in turn will restrict their cashflow. The rising interest rate environment is only going to further impact on a business’s freedom to operate.
The end of cheap money
Until this point, businesses have enjoyed record low borrowing rates from traditional banks due to the all-time low cash rate and fierce competition from non-bank lenders, enabling them to fund their growth cheaply.
This has meant it has often been considered ‘best practice’ to borrow to fund growth. Most small businesses, therefore, have outstanding loans in one form or another, and an increase in interest rates will essentially result in more expensive loan repayments for them. Since these are often long-term debts that will take years to repay, this will mean carrying the debt for longer, incurring more interest.
For those businesses looking to obtain shorter-term funding to invest in growth or cover them until more cash arrives, this funding will become more expensive. Banks and other lenders that require physical assets to secure finance to, will likely set more stringent terms. As any business owner who has taken out a bank loan knows, the prospect of losing your house because you can’t make payments really ups the pressure.
Borrowing to stay ahead
The issue is that, now more than ever, businesses need to have cash to get ahead. Competition in the supply chain is fierce, with suppliers, particularly those in Asia, able to select which buyers they want to sell to. Australian businesses are also facing record high container prices, with shipping operators preferring to focus on larger markets, such as the US.
All this means that Australian businesses may not be getting the best terms from suppliers, meaning that stock is slower to arrive, and margins are cut (or costs are passed onto customers).
Companies that have emerged cashflow-positive from the pandemic are in an excellent position to get ahead of competitors by buying stock more quickly and in greater volume from suppliers, in order to secure themselves better rates and more immediate availability. But those companies that can’t fund this may fall behind.
Finance, for supply chains
There are a range of so-called ‘non-bank lending’ products out there that businesses can turn to that will be much more flexible to the needs of smaller, high-growth businesses across a range of industries.
Many non-bank lenders won’t require a business to specify a physical asset to secure lending to, making them more suitable for eCommerce or other similar businesses. Plus, funding types such as Debtor Finance (sometimes known as invoice finance) mean that companies can receive cash from unpaid invoices early, without waiting for the usual 30, 60 or 90 days to pass. An innovative supply chain financier, such as Octet, can provide the facility for this, and will take a small fee, but ultimately that funding is still yours from your own sales, and, therefore, is less prone to interest rate rises.
On the procurement side of your supply chain, Trade Finance can assist to line of credit means we pay your suppliers immediately, while you pay us back over time. Take advantage of any available early payment discounts, whilst receiving your goods quicker than the competition. The next few years are going to be uncertain and challenging, but savvy businesses shouldn’t settle for high-interest bank funding to see them through, without at least considering the alternatives.