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David Morobe, regional general manager at Business Partners Limited.
David Morobe, regional general manager at Business Partners Limited.

How will the interest rate hike impact SME owners?

ECONOMIC NEWS

Issued by MSL Group - Nov 27th 2018, 10:41

Despite a strengthening rand and slight recovery of the oil price, the South African Reserve Bank (SARB) announced that the repurchase (repo) rate will increase by 25 basis points to 6.75 percent, effective from 23 November 2018. This increase in interest rates – which pushes the prime lending rate up from 10 percent to 10.25 percent - is the first rates hike that South Africa has seen since March 2016.  

According to David Morobe, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), the impact that an interest rate hike has on small and medium-sized enterprises (SMEs) is two-fold. “Higher interest rates will impact businesses directly as debt will become more expensive, but it will also have an indirect impact on businesses by negatively impacting the spending habits of consumers.”

Focusing first on the direct impact of higher interest rates, Morobe points out that almost all small businesses have outstanding debt in one form or another. “Simply put, when interest rates rise, any debt owed by the business will become more expensive. This will have an immediate negative impact on the business’ ability to service their existing debt, as well as their cash flow."

“As SMEs typically have quite a limited cash flow – especially in the early days of operation – the additional cash required to pay off the more expensive cost of debt may also result in some cash flow shortfalls, which may have a knock-on effect on a business’ ability to pay their suppliers and operational costs.”

Secondly, Morobe explains how a rise in interest rates will affect consumers’ spending behaviours, which will indirectly impact the bottom line of many businesses – particularly those that are consumer-serving. “By raising the cost of debt, consumers will have less disposable income to spend on the services and products provided by small businesses. Changing customer spending habits may also reduce cash flow further.”

In light of these challenging conditions, Morobe proposes the following survival tips for SME owners:

1. Plan ahead: Now is the time to review costs and fine-tune efficiency and productivity. Plans for the future should include more than one scenario, and staff should be drawn into these exercises as this will help manage expectations.

2. Manage your cash flow: This is supremely important. Businesses with weak debtor management systems and leaky budgets will face an uphill battle. Better debtor management can be enforced by timely debt collection, clear payment terms and credit policies, as well as thorough credit checks.

3. Improve your service: Increased competition in the coming months means businesses will be tempted to move to other suppliers.

4. Keep your eye on the inevitable business opportunities that downturns bring: Some of the most enduring businesses in the world were born during trying times – don’t let the challenge that lies ahead blind you of the opportunities that arise as a result.

Morobe concludes that business owners should remain positive and implement these and many other tactics to survive and thrive during these tough economic times. “While South Africa may be struggling to achieve the required economic growth to deal with its social and economic challenges, it remains a land of opportunity for the entrepreneurially minded. We have all the resources required to be successful - the people, the skills, and we have the right mindset to overcome any obstacle that we are faced with.”

 

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