We have looked at rising interests rates and how they impact your business last month. This time let’s take a deeper look at what a ‘squeeze from both sides’ means and what you can do about it. This happens when a small business is hit by falling income and rising costs at the same time. Higher interest rates cause both, so the pressure builds from two directions.
Side 1: Revenue is pushed down.
Households with mortgages and higher living costs cut back on discretionary spending.
That hits retail, hospitality, trades and personal services first.
Households facing financial pressure often reduce discretionary spending.
Service-based businesses can be affected if clients reduce discretionary spending or delay projects, and consulting, agency and advisory firms often feel slowdowns earlier than expected.
Side 2: Costs are pushed up.
Variable-rate loans, overdrafts and equipment finance reprice after each hike. For example, CBA is raising rates by 0.25% p.a. on eligible variable-rate business loans.
Other costs rise too, such as rent reviews, wages, supplier prices and fuel. The RBA noted that monetary policy can't fully offset sudden price shocks from external events. Rate hikes also won't bring down fuel-driven inflation.
Employers may face rising wage expectations as staff manage their own household cost pressures.
Why it's dangerous. Your margin gets squeezed from both ends, and you can't easily pass costs on to customers who are cutting back. The pressure usually shows up in cash flow before it shows up in profit. Profitable businesses can still face cash flow pressure. A business can look busy while supplier bills, wages, tax obligations and loan repayments rise faster than income.
Who is most exposed. Businesses with variable-rate debt, thin margins, discretionary-spend customers or little cash reserve. The RBA says company insolvencies remain elevated in hospitality, construction and transport, which are more exposed to wage and input cost pressures.
How to strengthen your position
Falling or uncertain revenue - Retain customers first. Highlight value rather than discounting heavily.
Late-paying customers - Invoice immediately, shorten terms, automate reminders, and offer card or direct-debit payment. Cash flow is often affected more by delayed payments than by reduced revenue.
Higher debt costs - Review every facility's rate and structure. Consider fixing part of the debt for certainty, but check agreement terms first, as some commercial lending or lease structures include break fees or early exit costs. Consolidating several expensive facilities into one can simplify repayments, but compare total cost.
Rising operating costs - Reprice where margins have eroded. Renegotiate leases, supplier terms and insurance, and cut low-margin work or subscriptions you don't use.
Cash visibility - Build a rolling 13-week cash forecast and stress-test it against another rate rise and a revenue dip. Review your debt, forecast cash flow, build an appropriate cash buffer and stress-test your finances against higher interest rates.
Tax debt - Relying on tax debt as an ongoing financing strategy can become expensive. Contact the ATO early about a payment plan rather than letting arrears build.
Early signs of stress - Talk to your lender before you miss a payment.
Heightened competition for business loans and automated approvals have improved access to credit, including for smaller businesses. That means refinancing or restructuring options are available if you shop around.
This is general information, not financial advice. If you have any questions please ask me at paul@congdonfuzi.com.au