The impact of interest rate hike on businesses
Given the tough economic conditions that SMEs are already facing, the increase in interest rates will add more pressure by making debt more expensive. Profit margins are also likely to be impacted in the long term due to a lower demand from consumers that will tighten their belts as disposable income decreases.
For most of the middle class consumers, a rate hike typically means an increase in mortgage and vehicle repayments. This means that businesses that are highly geared and operating on low margins may struggle to service their debt commitments.
As a result, small businesses may run into cash flow problems, making it difficult for them to manage running costs and payments to staff and suppliers for goods and services. Moreover, the possibility of further interest rate hikes next year will require SMEs to place more emphasis on their annual cash flow forecasts and regularly review them as business conditions change.
Difficult trading conditions coupled with natural resources constraints are likely to make things more difficult for SMEs in the coming year. SMEs in the import and export sector are also being heavily hit by the depreciation of the rand, made worse by the combined effect of rising inflation.
Higher interest rates could also discourage businesses from expanding as the cost of expansion becomes increasingly more expensive. Most start-up businesses have little equity and rely on debt. However, businesses with low gearing and high levels of excess cash may benefit from high interest rates since the excess cash can be invested for a higher return.
Morné Cronjé, Head of FNB Franchising
For any franchisee or franchisor an increase in interest rates will mean that the cost of borrowing rises and will also mean an increase in the monthly expenses. A rise in interest rates discourages investment in the franchise industry and makes it difficult for franchisees to borrow money to finance their operations, payroll and general purchases.
Franchise owners need to be savvy and come up with real ways to increase their cash flow and cut unnecessary expenses. The more you understand the fundamentals to maintaining your business, the more likely it will survive. The interest rate increase will ultimately put additional pressure on an already stretched South African consumer.
Franchise concepts eventually evolve with time due to global influence and trends. Franchisors should be aware of the volatile economic environment and tweak their business plans where needed. While the franchising industry is expanding in various sectors such as fast food and retail we need to ensure that franchises remain relevant and if in debt seek professional help.
Attie Anderson, Head of Business Lending – FNB Property Finance
Commercial property investors will be negatively affected due to a decrease in consumer spending, which will impact them directly if they are trading from the property, or indirectly if their tenants suffer as a result of the interest rate increase.
Moreover, this could lead to tenant vacancies or rental arrears, and may even force investors to reduce their rent in order to prevent tenants from vacating and seeking more affordable rentals.
Commercial property investors that experience cash flow strains should approach their banks for financial assistance. This will give the bank an opportunity to assess the situation and perhaps find alternative repayment solutions, rather than follow the undesirable route of foreclosure in cases of default.
Dawie Maree, Head of Information and Marketing – FNB Agriculture
The interest rate increase will put more pressure on commercial farmers that are already facing rising debt levels due to the weak rand and severe drought which is pushing up input costs.
Struggling livestock farmers will be hardest hit, since they have already sold off some of their stock and used the funds to cover debt. Therefore, they can no longer afford to sell more stock to account for the interest rate increase. Affordability will be a major issue, especially disposable income to buy farm feed.
Because consumers will be hard pressed, we are likely to see a lower demand for agricultural commodities in the long term, especially for luxury products.
On a positive note, we might see retailers absorbing the interest rate increase, in order to draw more customers into their stores, by not increasing costs for staple foods such as bread and milk.
The impact of the interest rate increase will vary from farmer to farmer depending on the size of their operation. We encourage farmers that are struggling to service their debt to seek financial advice and approach their banks for assistance.