How small businesses are responding to cash rate changes

NZ Cash rate 2

What the official cash rate is, the impact of recent increases to the cash rate, how it affects interest rates and what businesses can do to prepare for a shift in finances.

At a glance

  • With the RBNZ raising the cash rate to 1.5 per cent in April, businesses are adjusting and bolstering their finances.
  • Many economists are predicting the cash rate will reach three per cent by the end of 2022.
  • Preparing for a change in finances could mean switching from a variable rate to a fixed rate loan, and updating your cash flow projection tools.

Changes to the official cash rate are affecting the cash flow of small businesses in New Zealand.

The Reserve Bank recently raised the official cash rate (OCR) from 1% to 1.5%, the fourth consecutive increase and the biggest single increase since May 2000. This sets the OCR back at the pre-pandemic June 2019 rate, at the time a record low.

We explore what’s happening with the cash rate and what businesses can do to bolster their finances ahead of potential further increases.

What’s happening with the cash rate?

The OCR is the rate of interest charged on loans made between financial institutions. As this rate changes, financial institutions often pass on those fluctuations to their customers via changes to loan interest rates.

According to Kelvin Davidson, an economist and business analyst, and CoreLogic New Zealand’s Chief Property Economist, small businesses should get ready for further increases to the cash rate before the end of the year.

“Most commentators now expect the OCR to reach 3% by the end of 2022, with scope for a further small rise in the early stages of 2023,” he says.

He explains the rationale for forecast changes.

“An OCR rise is primarily an attempt to rein in inflation expectations,” says Kelvin. “But it perhaps also provides a degree of ‘insurance’, whereby a higher OCR now means there’s more scope to cut again if the economy falters.

“Just like a typical homeowner, small business owners will need to budget on higher financing costs over the next few years.”

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How does the cash rate affect interest rates?

When financial institutions pay higher interest on loans, they often pass those higher interest rates on via changes to the interest rates their customers pay. While a variable interest rate will often vary depending on changes to the cash rate, a fixed interest rate will not. Taking on a fixed-rate loan, therefore, means you are not adversely affected by higher rates even when the cash rate goes up.

Prospa’s fixed-cost loan

Some lenders – including Prospa – take ‘fixed interest’ a step further. Our fixed-cost approach means the amount of the loan isn’t affected by changes to the cash rate or anything else throughout the loan term.

“We provide transparency on overall costs, helping small business owners to make more accurate cash flow projections,” says Adrienne Begbie, Managing Director at Prospa New Zealand. “The Prospa Small Business Loan is an upfront priced loan, so you know in advance the total amount payable, including any interest, fees or charges. The process is simple and the effects immediate.”

What are small business owners doing?

Earlier this year, after two consecutive OCR increases, we partnered with OnePicture Research* to ask more than 500 Kiwi business owners and leaders about their business priorities and challenges for the year ahead, and the actions they would take to overcome those challenges.

Growth was on the minds of the majority of business owners – with ‘business growth’ and ‘increasing sales’ coming in at first and second priorities overall. Those who were feeling positive about their business over the coming 12 months were also more likely to be focused on growth.

The businesses surveyed, which all had fewer than 50 employees, were operating in an environment of increasing inflation, supply chain disruption and unpredictable business interruption, and the likelihood of ongoing interest rate increases.

Still, confidence was buoyant – 70% were positive or neutral about the year ahead, and those that had been operating less than two years were even more likely to express a positive outlook than those who’d been operating more than 10 years.

To achieve their goals, small businesses planned to invest more in:

  • Staff training, development and deployment: 23%
  • More advertising: 21%
  • Internal process refinement and system upgrades: 17%
  • Engaging with customers: 14%
  • New products and business development: 13%

How local businesses can prepare for more changes

So if you’re a local business facing the prospect of changes to the cash rate, how might you go about planning for the challenges it might bring? Here are some quick tips you could use to prepare:

  • If you anticipate a significant change in your business’ finances in the immediate future, it makes sense to start putting some money aside to bolster cash reserves that you can rely on in times of need.
  • Forecast and manage cash flow. Update your cash flow management tools to improve your projections of future cash flow. Prospa offers free tools anyone can download and use (you don’t have to be a Prospa customer), including a handy cash flow template and a profit and loss projection tool.
  • Switch to a fixed rate. Consider switching from a variable rate to a fixed rate loan, such as a Prospa Small Business Loan, to take advantage of knowing that your repayments will stay the same even if the cash rate rises in the future.

*Understanding the Priorities and Financial Needs of Small Businesses, One Picture x Prospa, 2022

A Prospa Small Business Loan provides up to $150,000 in as little as 24 hours to approved applicants, with fixed costs for the term of the loan. Find out more and apply now.

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