Top Tips For Financial Stability Despite Increased Interest Rates
The Reserve Bank of Australia (RBA) currently has a cash rate target of around 4.35% — which ultimately has resulted in increased interest rates.
Businesses will likely feel the impact of these increased interest rates when they need to borrow money.
As such, to try to ease the pressure on your cash flow and budget, below are some tips you can try.
Review Your Current Budget
Increased interest rates can negatively impact any business’s budget. To mitigate the effects somewhat, you may want to try reviewing your current budget and identifying changes you can make to soften the blow of rate hikes.
Check the type and levels of your current debt (if any) to figure out how much disposable income you really have.
You can also use this time to check your emergency fund — which should ideally have a minimum of three to six months’ worth of expenses.
If your emergency fund has not reached that minimum yet, adjust your budget to see how much you can set aside per month to create a good-sized emergency fund.
Take into account that increased interest rates can cut into your emergency fund more than expected.
Create A Financial Forecast
A financial forecast predicts how your business will fare in the near future so you’re not taking unnecessary risks.
By creating one, you can also make contingency plans for possible events like high inflation, stock market corrections, and long- or short-term business disruptions.
It can also help you take advantage of opportunities such as sudden economic growth despite the increased interest rates.
Reduce Sources Of Discretionary Spending
Discretionary expenses might fall into the nice-to-have category during this time. You can adjust your budget or company processes to make up for discretionary spending.
For instance, advertising and public relations could be considered discretionary marketing costs. You could cut back on them, and your business would generally continue running.
Business travels for client meetings, conferences, and board meetings are typically all discretionary expenses as well.
You may want to switch to online meetings to combat the newly-increased interest rates, especially if you have various employees working remotely.
Consider Financial Counselling
An increase in any kind of debt’s interest rate can be a cause of anxiety for business owners. After all, higher interest rates can create financial shortfalls that can quickly spiral out of control.
If you need help figuring out how to manage your finances, talk to a finance counsellor. They can help you in several ways, like the following:
- Helping you understand and fix financial records
- Speaking to your lenders about payment arrangements
- Creating strategies for short- and long-term financial difficulties
- Informing you of grants and concessions
Set Monthly Limits For Expenses
Budget plans can better help you plan your expenditures, whether monthly, quarterly or annually. However, it’s ideal that you make it as detailed as possible so you know where every dollar goes.
As such, adjust your budget plan so that it reflects limits on monthly expenses.
Before setting a limit, list down your monthly expenses first, then divide them into necessary and discretionary spending. Cut the discretionary expenses as much as you can.
You can also adjust the necessary expenses. For instance, shop around for wholesale vendors and see if you can find anyone who offers cheaper products.
However, when setting monthly limits, remember to still add some leeway in case of unexpected price fluctuations.
Check For Possible Business Tax Deductions
You can claim tax deductions on expenses that directly help you earn assessable income. Some of these are listed below:
- Daily operating expenses
- Buying products and services that your business needs
- Some capital expenses, like machinery and equipment, and the interest paid if a loan was taken out.
However, fines and any expenses for private use are usually not tax deductible.
It’s also important to record all your expenses since you’ll need them to prove your tax deduction claims.
Frequently Asked Questions
A central bank may suggest increased interest rates to avoid the risk of a recession, whether in the global economy or domestically.
Will There Be Another Cash Rate Hike?
As of December 2023, the RBA has decided to hold the cash rate steady. This gives them more time to assess how the rising interest rate affects demand, inflation, and the labour and property market.
However, there may be a possibility of another hike after the inflation report for Q4.
What Are The Potential Challenges For Businesses?
As the interest rate rises, the RBA hopes that this will discourage people from spending too much. In effect, this can bring down prices and inflation in the future.
The downside of this is that businesses that are already in a financially unstable position may be further affected. If they’ve taken out a loan, an increase in the interest rate might cause further financial pressure.
How Will These Higher Interest Rates Affect Businesses?
Higher interest rates can significantly affect business financing. It also has other effects.
Perhaps the most obvious effect is that it becomes more expensive for businesses to secure funding by increasing the cost of loans and credit facilities.
You’ll also need to be more careful about making large investments and expanding operations. After all, your consumers might be delaying or reconsidering their buying decisions, which can lower sales.
However, business financing may still be beneficial for you or your business under one of the following conditions:
- Your business is financially stable
- You have a good credit history and a strategy to effectively use the funds
- Your business has a positive revenue forecast so you can invest money back into your business
Conclusion
The RBA is currently enacting a tight monetary policy to help contain inflation.
Some lenders have also been announcing changes to their variable rate — but the interest rate for your own loan specifically still depends on your loan product.
If you’re thinking of taking out a loan to improve your business despite the higher interest rates, Lumi can help you choose the right loan for your business needs.
At Lumi, we specialise in bespoke business finance solutions to help your business thrive. We offer unique and market-leading benefits on small business loans and lines of credit up to $500,000.
Why us? We always adapt our products to the ever-changing needs of the market. That’s why we’ve recently launched Rate Ease™, Australia’s 1st rate-reducing business loan. Aiming to help make business funding more affordable in this high-interest market, this new business loan feature rewards good repayment behaviour by reducing an eligible customer’s rate every 4 weeks, ultimately helping them save thousands in interest.
