The Reserve Bank of Australia’s (RBA) decision to increase the official cash rate for the second month in a row has had widespread ramifications.

For small and medium business owners, you may be wondering what the implications of the cash rate rises are and how your business will be affected. Let us explain.

The decision

In May, the RBA increased the official cash rate by 25 basis points to 0.35 per cent. In June, the official cash rate went up a further 50 basis points to 0.85 per cent

Prior to May, the last time the RBA increased interest rates was in November 2010.

Why did the RBA increase the cash rate and what does it mean?

The RBA increases interest rates when inflation tips over a certain point (the goal is to keep it between 2-3 per cent). Inflation is the main measure of cost of living, or how much our money is worth, and it has surged in Australia.

The latest inflation data showed Australia had recorded the highest quarterly and annual increase in more than two decades.

By increasing the cash rate, the RBA is essentially trying to slow down demand in the economy and discourage people from spending money.

What’s the impact on business owners?

Once the RBA raises the cash rate, lenders often pass this on to borrowers via an increase in their interest rates.

What this means for small business owners and SMEs is that finance for things like company cars, business assets and plant and equipment could become more expensive.

Those with existing debts may already be feeling the impact, depending on the type of finance you have. If you have a fixed-rate loan or repayment schedule, you may have been shielded from the cash rate increases.

Generally speaking, businesses may also see some impact on their margins, with suppliers passing on higher operating costs. Depending on the business, if consumer spending cools, this could affect demand and ultimately profits. And if businesses are tied to big-ticket purchases that require financing, they could also see demand decrease as buyers face higher borrowing costs.

Are further cash rate increases expected?

Yes. Reserve Bank governor Philip Lowe said the Board was committed to doing what was necessary to ensure that inflation in Australia returned to target over time.

“This will require a further lift in interest rates over the period ahead,” he said.

Lowe indicated it was not unreasonable for the cash rate to climb to 2.5 per cent.

What should business owners do?

With interest rates likely to continue going up, it’s important to act early, particularly if you are in a tight financial position.

Review any existing debt and make sure your finance still works for you.

If you do need equipment or assets (and potentially want to make the most of the instant asset write-off scheme), speak to us about how best to finance the purchase.

As specialist asset finance brokers, we understand the difficulties facing small and medium-sized business, including the need to free up cash flow for operations.

Whether you want to compare provider offerings, source financing or refinance existing credit lines, we are here to help. Get in touch today.