6 ways to stay ahead of an interest rate rise

For many newer business owners, the Reserve Bank of Australia’s recent interest rate rise will be amongst the first rate increases they’ve experienced since starting their business.

Interest rate cycles are a natural feature of our economy. There’s no way for businesses to stop interest rate rises, but there are ways manage when they occur.

Rising rates generally mean higher costs for businesses. Required loan repayments increase, and other outgoings – such as employee wages, supplies, and raw materials – become more expensive, putting pressure on profitability.

At the same time, sales may slow as rising mortgage rates leave homeowners with less disposable income for non-essential items, and higher deposit rates encourage consumers and businesses to save instead of spending or investing.  

How to handle a rate rise

1. Stay on top of your business finances

Practising sound financial management makes it easier to respond to interest rate changes. Accounting software such as Xero or QuickBooks helps you track expenses and cash flow so you can more easily review your finances and adjust operations as needed – maybe by promoting your more profitable products or services and downplaying those with lower margins.

2. Manage existing debts

By paying off debt quickly, you’ll avoid accumulating more interest on the debt and save on interest payments. Prioritise repaying high-interest debts and consider consolidating multiple debts into a single lower rate loan.

3. Reduce unnecessary expenses

Delaying significant purchases or investments until interest rates stabilise will help maintain your financial position. You could also look for ways to minimise costs before your margins get squeezed by higher prices or lower sales – such as reviewing software licenses and subscriptions and cancelling or downgrading any you’re not using or getting value from. Also look to renegotiate other fixed costs such as utilities, legal, account and IT support retainers and cleaning or maintenance contracts. Look at bundling with one provider for greater value or lock in contract that lock in an attractive rate in return for a longer term commitment.

4. Lock in prices with suppliers

When interest rates rise, it's common for vendors to lift their prices. If possible, lock in prices with your suppliers before they rise. This may help you avoid sudden increases in costs for raw materials, which could impact your bottom line.

5. Review your pricing and loyalty

If your costs go up, consider whether your customers will bear a price increase to close the gap in your profit margins. Look at your competitors’ pricing and understand your customers’ behaviour to determine if they’ll stay loyal to you if you do raise prices. If raising prices isn’t an option, look to reward loyalty by encouraging customers to buy more with a packaged or bundled offer or other loyalty discount programs.

6. Seek advice

Your bank, accountant or financial adviser can provide expert guidance on the most suitable ways to manage cash flow and reduce expenses so you can thrive even as interest rates increase.

By being proactive and seeking guidance, you can navigate the challenges associated with rising interest rates and emerge stronger than ever before.