Interest costs need not be a burden

SMALL business owners have the ability to reduce the impact of interest rate costs on their cash flow.

Interest rates have already risen five times since November and seem likely to rise at least another 0.25 per cent soon.

Obviously, the best approach is to shop around and get the best interest rate possible.

Small Business Development Corporation acting managing director Bruce Macfarlane said businesses needed to monitor their cashflow with Christmas approaching.

GST and PAYG remittances for many small businesses are due in November too.

Mr Macfarlane said small business owners needed to keep close control over their debtors and creditors.

“Try and avoid having too much stock. That, after all, is an interest cost,” he said.

BankWest senior corporate dealer Chris Butler said small business owners on long to medium-term loans should look at hedging at least part of their business loan if they wanted cashflow certainty.

Some analysts predict another interest rate rise in November.

“Hedging takes one form of uncertainty out of business,” Mr Butler said.

There are two ways this can be done. The small business owner can opt to change from a variable loan product to a fixed loan product.

Or, the owner can opt to take a derivative – a product derived from an underlying product.

Mr Butler said this meant the loan’s interest rate charge could be changed from variable to fixed.

“At the moment the fixed rate is higher than the floating interest rate but there is the possibility that rates could rise above that fixed rate,” he said.

“However, by fixing the rate, you don’t get any benefit from a fall in interest rates.”

Mr Butler said there were a variety of loan products available to businesses.

For business lending, the products seem to fall into three main categories – bank bills, cash advances and overdraft facilities.

With bank bills the interest rate cost for the period is deducted from the loan. With a cash advance, the borrower has to pay the interest plus the loan.

With some loans, the borrower elects to fix the interest rate from 30 to 180 days.

At the end of the period, the interest on the loan is reassessed at the market rate and the period is again nominated.

Mr Butler said borrowers could set an interest rate cap and floor to set an interest rate band on their loan.

“It’s horses for courses. Look at what you want to achieve because there is a world of possibilities out there,” he said.

“One thing people can do is look at locking in part of their business loan to a fixed period – as they would do with their home loan.”

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