Higher in­ter­est sur­vival

Finweek English Edition - - INSIGHT -

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.”

Ravi Goven­der

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