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Review after rates rise

BUSINESS borrowers should review their cash flow projections to assess the impact of higher interest rates, accountants and finance brokers have recommended.

Last week’s 0.25 per cent rise in official interest rates, to 5.0 per cent, is widely tipped to be the first of several small increases.

HSBC chief economist John Edwards believes “another 75 basis points before the end of next year is highly probable”.

He suspects the Reserve Bank will move quickly to lift rates again.

“A December tightening has to be a pretty strong chance,” Mr Edwards said.

Geoff Kidd, a partner at accounting and business advisory firm Grant Thornton, recommended a four-step review process.

He said businesses should conduct cash flow projections for the next 12 to 24 months based on a range of interest rate scenarios.

“Then they will know what effect higher rates have on the business,” Mr Kidd said.

“Once you’ve done that, you are in a better position to go to your bank and assess your options.”

A second step for businesses was to look at opportunities to improve their working capital management.

This could include reviewing stock levels and tightening up debtor payments.

A third step was reviewing the structure of their debt and assessing opportunities for consolidation.

For instance, they could reduce their overdraft and increase their fixed term debt, or vice versa.

A fourth and final step would be to look at the possibility of using derivatives, such as interest rates caps, or switching to fixed rate loans.

However Mr Kidd cautioned that the cost of such measures has already increased.

“That should have been done earlier when rates were still lower,” he said.

Brian Preston, executive director of finance broking firm CrediFlex, believes interest rates will need to rise further before they attract much attention.

“Because rates are so low, psychologically most owners are more focused on other costs,” Mr Preston said.

He added that most businesses are conservatively geared and are therefore not highly exposed to interest rate increases.

Nevertheless he strongly recommends that businesses assess the impact of future rate hikes.

“Very few businesses in Australia do that sort of analysis,” Mr Preston said.“The rest seem to muddle through.”

Lyall Bear, business services partner at BDO Chartered Accountants and Advisers, said he has recently advised a number of clients to hedge their interest costs.

Mr Bear said banks offered a number of different hedging products, including ‘bundled’ products that combine a bank bill facility with an interest rate option.

These products protect the borrower from high rates but allow them to benefit from any reduction in rates.

“However you need a reasonably large amount of debt to make it worthwhile,” Mr Bear said.

Gary Johnson, director business express at BankWest, said small business operators could achieve a similar outcome by taking a blend of fixed rate loans and floating rate loans.

 

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