Higher interest survival
The rising interest rate, coupled with rising inflation, high consumer debt levels and a contracting economy is a threat to the survival of SMEs, warns FNB’s Lee Bromfield. According to Bromfield, the 0.25% interest rate hike earlier this month affects the entire SME ecosystem, adding financial pressure to an already stressful entrepreneurial environment.
The 17 months preceding the latest hike presented small business owners with the opportunity to borrow at record low rates, which resulted in small businesses taking on new debt, or increasing their current debt burden, says Ravi Govender, head of small enterprises at Standard Bank.
“The cost of finance at low interest rates is perceived to be far less than the potential, future capital gains that can be realised by businesses. These businesses could have used the low interest rate to expand their businesses by purchasing more equipment, increasing their vehicle f leets or acquiring additional staff numbers. Some businesses also took advantage of this period by paying off their debt quicker, which could have helped them retain more of their earnings because of their reduced debt servicing obligations,” Govender says.
While many SMEs capitalised on the low interest rates to expand existing business, more expensive debt presents a major threat to indebted small businesses.
“The immediate impact of an interest rate increase is felt in the balance sheet, as businesses have to pay more to service the same debt. An increase in expenses not only affects profitability but may also reduce cash f low for some businesses. Less money to buy inputs will translate into less production, which will further decrease profits,” he explains.
Mabyanine Phiri, portfolio associate at ACM Gold, agrees, adding that SMEs with asset-sensitive balance sheets will be especially vulnerable as variations in interest rates may negatively affect their financial performance. AN SME INTEREST RATE SURVIVAL GUIDE Govender says small businesses can prepare for rate increases in two ways, namely better f inancial planning and optimising operational efficiency.
“On the financial side they [SMEs] should be able to plot their current level of expenses and income to find the breakeven point. This will allow them to check for items they can cut back on to save money. Small things such as identifying which loans have the highest interest rate and paying those off quicker make a huge difference. Reducing electricity consumption by switching off non-essential equipment at night will also help,” he advises.
“The Reserve Bank has mentioned that interest rates are likely to increase further, so small businesses should start making provisions in their budget for additional increases in the rate of interest, to ensure that they will be able to meet all their debt obligations.”
He adds that SMEs should consider outsourcing functions that are non-critical to the business and can be done at a cheaper rate by someone else. “They could also look at sourcing suppliers who offer their products at more affordable prices, or reducing inventory for which they do not get a bulk buy discount. For businesses that are transport intensive for instance, using a cheaper mode of transport, or installing speed monitoring devices on their f leet to curb speeding, will have a positive effect on cost reduction. The one thing businesses can be sure of is that there will always be unexpected expenses. Planning ahead for these makes all the difference.”