If your business has debt, plans to borrow or depends on customers who are feeling the pressure of higher repayments, the next RBA decision is worth watching.

Interest rates have risen three times this year. The Reserve Bank of Australia left the cash rate at 4.35% in August, but made it clear that inflation remains a concern.

The next decision is due on 29 September. No one can say with certainty whether rates will rise again or remain on hold, but business owners do not need to wait for the announcement to consider what either outcome could mean.

Would another increase place pressure on loan repayments or cash flow? If rates remain where they are, has the business allowed for a longer period of higher borrowing costs? And could pressure on customers affect sales or payment times?

These are useful questions to ask now, particularly if you are preparing budgets, considering new finance or planning a significant purchase.

The cash rate is only part of the story

Changes to the cash rate can influence the interest rates charged on business loans, overdrafts, equipment finance and other credit facilities.

However, the effect will not be identical for every business. The rate you pay can also depend on the type of finance, whether it has a fixed or variable rate, the term of the facility, the security provided and the lender’s assessment of risk.

Some facilities may respond quickly to a cash rate change. Others may not change until a fixed-rate period ends or the loan is reviewed.

That makes it important to understand the terms of your own finance rather than relying only on the headline cash rate.

Start by bringing together the details of each loan or facility, including the current interest rate, whether it is fixed or variable, when any fixed or negotiated rate expires, upcoming review or refinancing dates, and your repayment obligations.

If several facilities were established at different times, the overall cost of borrowing may be less obvious than it appears. Bringing the details together can provide a clearer picture of your exposure.

Allow for more than one outcome

Budgets are often prepared using a single set of assumptions. In an uncertain interest-rate environment, it can be useful to consider several possible outcomes.

For example, consider what would happen if rates remained at their current level for the rest of the financial year, increased by another 0.25 percentage points, rose further than expected, or eventually fell later than the business has assumed.

The purpose is not to forecast the RBA’s decisions. It is to understand how sensitive your business is to changes in borrowing costs.

For a business with significant variable-rate debt, even a relatively small increase may affect monthly repayments and the amount of cash available for other commitments. A business with little debt may be less directly exposed, but could still feel the effects through customers, suppliers or planned investment.

Scenario planning can help identify whether there is enough room in the budget to absorb higher costs without putting pressure on tax payments, supplier invoices, wages or other essential expenses.

Look beyond the repayment amount

Higher interest costs do not only affect the loan account. They can place pressure on profit margins, particularly if the business has not updated its budget or pricing assumptions. They can also influence decisions about staffing, inventory, equipment and expansion.

If finance costs have increased, consider what this means for net profit and how much additional revenue may be needed to recover the cost. It is also worth reviewing whether current pricing remains appropriate and whether cash reserves provide enough room to absorb further increases.

This does not mean every increase should immediately be passed on to customers. Pricing decisions also need to consider demand, competitors, customer relationships and the value being provided.

The important point is that higher finance costs should be visible. If they are buried among other expenses and only reviewed at year-end, the business may carry the pressure for months without responding.

Keep an eye on your customers

The effect of interest rates extends beyond businesses with loans.

Customers may also be dealing with higher mortgage payments, personal borrowing costs or business finance expenses. This can influence how much they spend, which purchases they delay and how quickly they pay invoices.

The impact will vary between industries. A business selling discretionary products may experience it differently from one providing essential services. Businesses that sell to other businesses may notice customers taking longer to approve work or becoming more cautious about new commitments.

Some signs worth watching include:

• a decline in enquiries or conversion rates
• customers choosing lower-cost options
• more requests for discounts
• projects being delayed or reduced
• slower payment of invoices
• an increase in overdue accounts.

One month of weaker activity does not necessarily indicate a lasting change. Seasonal patterns and the timing of large orders also need to be considered.

However, if several indicators are moving together, it may be worth reviewing sales forecasts and expected cash receipts.

Revisit planned purchases and investments

Higher borrowing costs can change the economics of a planned purchase.

Equipment, vehicles, property, technology and expansion projects may still support growth or improve efficiency, but the financing assumptions used when the decision was first considered may no longer be current.

Before committing, look at the total cost rather than focusing only on the purchase price or advertised repayment. This includes interest over the life of the finance, establishment and ongoing fees, deposits or residual payments, maintenance and operating costs, and the effect the purchase will have on working capital.

It is also worth considering the expected productivity or revenue benefits, as well as the cost of delaying the purchase.

The decision is not always simply whether to proceed. It may involve changing the timing, reducing the scale of the investment or comparing different funding structures.

A purchase that made sense under earlier assumptions may still be worthwhile. It should simply be assessed using current figures.

Do not assume refinancing will solve the problem

Reviewing your finance can be valuable, but a lower advertised rate does not automatically make refinancing the best option.

There may be application costs, valuation fees, early repayment charges, security requirements or changes to loan conditions. A new facility may also extend the repayment period, reducing monthly payments while increasing the total interest paid.

Before refinancing, compare the total cost over the proposed term, including establishment and exit costs, repayment flexibility, security and guarantee requirements, changes to lending conditions and the effect on future borrowing capacity.

The appropriate decision will depend on the business’s financial position, goals and existing arrangements.

Use the next decision as a prompt

The 29 September announcement will attract attention, but the most useful question for a business owner is not simply whether the RBA raises or holds the cash rate.

It is whether the business is prepared for both.

Before the decision, consider:

• Do we know the current cost of every finance facility?
• When are our loans due for review or refinancing?
• Does our cash flow forecast use realistic interest assumptions?
• Could we absorb another increase?
• Are customers taking longer to pay?
• Do planned investments still make commercial sense?
• Are finance costs beginning to affect margins?
• What action would we take if rates remain higher for longer?

These questions can provide useful insight regardless of what the RBA announces.

Focus on what the business can control

Interest-rate decisions are outside the control of individual businesses.

Understanding debt, keeping forecasts current and testing different scenarios are not.

The aim is not to react to every economic headline. It is to know where the business is exposed and make decisions using current information.

At Supervision Group, we help business owners understand their financial position, review cash flow and assess how changing costs may affect their plans.

If higher borrowing costs are placing pressure on your business, or you are considering new finance or a significant investment, speak with the Supervision Group team about the figures and assumptions behind your decision.