Asking for payment extensions. Pausing ad campaigns. Slashing graphic design projects. In the face of surging interest rates, entrepreneurs are making drastic decisions to cope with the new cost of their loan repayments.
With the official cash rate target now at 3.6%, business borrowers are adjusting to a vastly different economic climate than even 12 months ago, when rock-bottom interest rates encouraged entrepreneurs to borrow big.
And although the full weight of ten consecutive cash rate hikes is yet to be observed, the possibility of at least one more interest rate hike still exists.
Speaking to SmartCompany, small business leaders from across the country shared how they are adjusting to growing loan repayments, and the chance of another increase to come.
On Tuesday, the board of the Reserve Bank of Australia announced a 0.25% lift to the cash rate, the underlying figure which guides the interest rates Australian retail banks offer to businesses and households alike.
It marked the tenth consecutive rate hike in a row, and the latest in a series of monetary policy measures the RBA hopes will constrain inflation.
Inflation, represented by the Cost Price Index, hit 7.8% in the December quarter of 2022, far above the RBA’s target of between 2%-3%.
Boosting interest rates makes it harder for businesses and consumers to spend. Orthodox economic theory dictates that lower demand leads to lower costs, reducing inflation.
“High inflation makes life difficult for people and damages the functioning of the economy,” RBA governor Philip Lowe said while announcing the hike.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”
Inflation touches nearly every corner of a business’ operations, lifting the cost of everything from electricity to raw materials and vehicle fuel.
But for businesses with outstanding loans or lines of credit, interest hikes — the main weapon in the RBA’s arsenal against inflation — are causing their own financial strains.
Jane Robertson, the founder of Wagga Wagga-based Millwoods, says February was a very successful month for her business.
Yet interest rate hikes have flowed through to her financing arrangements, leading to tough decisions at the high-end footwear firm.
Repayments on her $150,000 overdraft facility, secured by her farm property, have risen dramatically in recent months.
Initial costs were “so low, like it was crazy low,” when she entered the agreement, Robertson said.
“I would hate to think what I’d have to pay now” if she tried brokering the same deal today, she added.
Even though her new season products are expected to drum up sales, Robertson said she is already cutting costs.
Graphic design work for the brand was among the first cut-backs, with the brand now planning for worsening scenarios.
“I was literally on the phone with my business coach this morning where we’ve just run scenarios if the sales don’t do what we anticipated,” she said.
“What’s next on the chopping block?”
Retailers that stock Millwoods are feeling the strain, too.
“They’re all struggling as well,” Robertson said.
“So normally, where we would be getting people paying for that stock straightaway, we’ve already got people asking for extensions.”
“They haven’t received their stock; they still want to receive it, they’re already asking for extensions on how they can pay for it.”
“It’s not just interest rates and repayments going up, it’s beyond the fence to small businesses that we then deal with.”
Beyond the fence is right: the brand, which imports goods from international suppliers, says the battle between inflation and growing interest rates has also influenced the Australian dollar’s buying power.
Although the RBA board “expects that further tightening” will occur, the growing sentiment among economists is that Australia may be near the end of its tightening cycle.
Not so in the United States, where onlookers are far more certain of multiple hikes this year.
The promise of greater returns on US dollars compared to Australian dollars is weakening the buying power of local businesses, Robertson said.
It’s a classic damned if you do, damned if you don’t situation for importers like her: interest rates are making it harder for local businesses to spend domestically, but by not matching US monetary policy, it’s becoming harder for Australian currency to secure goods from overseas, too.
“The shipment that we have just arrived, we actually secured the US dollar exchange rate at 73 cents which was really great,” Robertson said.
“I paid a deposit yesterday for getting US dollars yesterday and I managed to get us 63 cents.”
Sophie Walker’s business reaches a different kind of consumer but is facing similar economic concerns.
The enterprise was so successful that Walker’s husband was able to step away from a teaching job and spend time as a stay-at-home dad.
Advertisers, including small businesses founded by mothers, have long sought space on Walker’s broadcasts to reach that highly engaged audience.
But ad space purchases from SMEs have dropped between 30% and 35% from their peak, Walker estimates.
“More recently, with all the extra pressures, they’ve had to cut back in different areas of their business,” she said.
“And I feel like one of the first areas to go is their marketing budgets.”
“So a lot of brands that would commonly book five or ten ads throughout the year have had to say that they’re not in a position to at the moment.”
In their place, Walker said Australian Birth Stories is working with larger advertisers more often.
“I enjoy really supporting small businesses,” she continued.
“But I’ve got my own mortgage to pay, and my own staff to pay, so it’s forced me to kind of approach bigger corporate companies” which may have longer approval processes in place, she said.
Separately, the Australian Birth Stories website features educational resources and classes designed to help expectant parents through pregnancy and childbirth.
Walker recently conducted a sale to ensure revenue while some of those bigger corporate ad deals come to fruition.
Still, the rising costs associated with their mortgage means Walker’s husband has returned to reaching part-time, “to kind of support our family and take some of the pressure off the business, [the] kind of fluctuation in income.”
As her six-year-old business was already geared up for the transition to online business when pandemic restrictions first hit, “I’m doing it more tough now with the interest rate rises than I did during COVID,” she added.
Even so, some optimism exists among small businesses who believe their clientele will continue to choose quality even if it costs them.
Mel Devereux, the co-founder of Bendigo-based dog treat manufacturer Laila & Me, said her business secured a government-supported, pandemic support loan Laila & Me acquired at a 4% interest rate, which has ballooned to 8%.
Among other cost adjustments, the business may “focus on building strong relationships with our existing customers” to respond to a “tight” cash flow, Devereux said.
Robertson, of Millwoods, also suggested consumers may be focused on buying less, but buying ‘better’.
“I think when you’re looking at quality, and you’re trying to make your dollar go the furthest, quality is so important,” she said.
Others, including Office Brands CEO Adam Joy, suggested businesses can look beyond the “doom and gloom” arising from the interest rate hikes.
“For our B2B members, the hard part is staying focussed and finding new ways to adjust their spending priorities,” he said.
“Our members are tailoring their spending to meet their business’s growing needs across areas like technology, furniture, workwear, cleaning and janitorial – all areas that are, thankfully, interest rate-proof.”
The RBA board will meet again on the first Tuesday of April, with their next cash rate decision likely to test that sense of resiliency even further.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
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