Small business: what to do when interest rates change

Official interest rate announcements by the Reserve Bank of Australia (RBA) always generate a flurry of news articles and analysis. But what should small business owners do when rates change?

The short answer is that when rates change, you should review your finances.

Why interest rates matter

If rates have risen, you want to know what the impact will be on your cash flow and profit margin. And if rates have dropped, you want to know whether you can get a better deal on your loans or pay down your loans faster.

The short answer is that when rates change, you should review your finances.

The reality is that acting when interest rates have changed is probably too late. The aim with interest rates for small business owners is to plan ahead so that you are ready to take advantage when rates drop and are prepared for when they rise.

If they go up…

An interest rate rise means that the cost of borrowing money will increase. This means that businesses with debts will need to spend more of their income on loan repayments, reducing the amount of money left over each month.

If interest rates rise over consecutive periods, the cumulative impact on costs for small businesses can put many at risk.

If they go down…

If interest rates are on a downward trend, then it’s definitely time to review your finances. Lower interest rates mean the cost of borrowing is cheaper.

It can be a great time to consolidate your debts and even to renegotiate your interest rates with your bank. This gives you a chance to build a financial buffer so that when interest rates go up again you can absorb the extra costs without too many problems.

Read more: How do official interest rates affect small business?

So what happens if you do nothing when interest rates change?

If interest rates rise and you do nothing, you will see the cost of your repayments rise. If interest rates decrease, and you do nothing, you will see your loan repayments go down.

But more importantly, if you do nothing you are potentially missing out on opportunities to save money and to cushion your business against future rate rises.