Staying ahead of rate rises

With interest rates rapidly rising and more increases expected, many fashion business owners are starting to feel the pinch in their hip pocket. However, there are measures fashion businesses can take now to minimise the full impact of future rate increases. Matthew Nolan looks at the options.

While the August rate rise was the first for this year, it's the fourth in less than 18 months and adds another quarter of a percent to borrowing costs. In real terms this means an average business will be paying an additional $15 per month for every $100,000 owed if paying it off over five years. While this may only equal the price of a movie ticket, remember that we've now had four of these rises in 18 months and that many businesses owe several hundreds of thousands of dollars - you can quickly see how it adds up. 

So what can you do to help your business continue to operate in a higher interest rate environment?

Floating Vs Fixed

If you have a floating interest rate on your loan, the rate of interest charged moves up and down with market interest rate movements such as the increase we had in August. An alternative to this is to fix the interest rate that you'll be charged by your financier. While this may initially be higher than a floating rate, it's important to remember that you'll be locking in the rate in for a number of years, during which time it won't change if rates do continue to rise. On the down side, if rate do decrease you won't receive these reductions without changing from the fixed to a floating interest rate loan, which may not be possible or could incur switching fees.

If you're trying to decide whether to switch, consider what you think interest rates will be in a couple of years and compare this to the fixed rate being offered now. Also, consider the impact on your business of future rate rises, if you're not sure that your business could afford a significant increase, you may be best to fix the rate now and avoid that potential risk.

Pass on the cost

It important to think of interest on your borrowings as another expense in your business. As the cost of fabric goes up, most fashion businesses are conscious of passing this on to customers in order to protect gross profit margins. Interest is no different, it's a cost like any other and if you want to maintain the profitability to your business it's critical to recover this cost. While price increases are always unwanted, the natural option for most businesses is to pass this increased cost on to customers through a modest price increase as soon as possible, this should be explained correctly in order to have minimal impact.

Planning

With rising interest rates, coupled with an imminent federal election and a fluctuating dollar, it's never been more important to plan your business finances. A particularly useful tool is a cashflow, that will let you project just how much in borrowings your business will need. This will illustrate whether your business has access to sufficient financial resources such as loans and owner equity.  If a reasonable level of interest rate increases are factored into your cashflow projections, it can also help identify potential problems that may occur as a result of further increases and rising costs to your business.

Minimise borrowings

Rising interest rates means that borrowing money has effectively become more expensive. With this in mind, it's timely to ensure that your business doesn't have a credit balance in one bank account earning a modest level of interest, with borrowings through another account incurring lending interest rates. Ensuring money is optimally allocated between your business bank accounts each day can save significant level of interest costs.
Another option to minimise borrowing is to accept additional equity injections through bringing new shareholders into the business.  Whilst selling equity doesn't appeal to all business owners due to control and profit sharing issues, if it's evident that your business needs to reduce debt to survive in a higher interest rate environment, it may be an alternative worth considering. 

In closing, it's important to remember that we've enjoyed historically low interest rates for more than a decade. While they're now gradually increasing, they are still well below the burdensome levels experienced previously - providing a buoyant economy and giving most fashion businesses a real opportunity to continue their strong growth for many years.