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6 tips for small businesses to navigate the high-interest-rate environment

Small businesses play a vital role in the South African economy, but many rely on borrowing to fuel their growth. For these small and medium-sized enterprises (SMEs), the current high interest rates are creating challenges and anxiety as debt becomes more expensive to service.

However, there are steps small businesses can take to help them navigate the high-interest-rate environment while still maintaining their day-to-day operations. That’s according to Alan Shannon, Executive for Small Business Services at Nedbank, who explains that by understanding the implications of rising interest rates and implementing effective strategies, SMEs and entrepreneurs can still position themselves for long-term success. He offers the following guidance on how business owners can achieve this:

1. Assess your debts

Shannon says that the first and most important step business owners must take is to assess the types of debt they have and get a clear view of the interest rates they are paying. ‘Interest rates can vary massively between types of credit,’ he explains, ‘so knowing which facilities have the highest repayments allows you to structure your repayments to pay those high-interest debts off quicker and save money in the long run.’

2. Manage your expenses

In the current climate, it is important for small businesses to avoid unnecessary expenses,’ Shannon emphasises, ‘and that small-business owners would be well advised to evaluate whether their expenditures are contributing to their growth, or if some of that money could be better invested in paying off expensive debt.’ He also highlights that minimising expenses is one of the most effective ways to offset the impact of rising interest rates on the bottom line of any business.

3. Review terms with suppliers

Extend payment terms where possible in the interest of reducing the debt you require to fund your working capital cycle because this reduces the burden of higher interest rates on your business. This will prove difficult as suppliers are likely to be feeling the same effects of higher interest rates as you. It is also a good time to make sure that you are receiving the best deal possible with your existing suppliers by exploring alternate providers. This process will validate your existing supplier terms or potentially expose you to accessing better terms with a different provider.

4. Review your business’s financial plans

While each individual interest rate hike may seem relatively small, these hikes quickly add up to have a significant impact on your business’ finances and long-term plans. Shannon advises small business owners to carefully evaluate their financial position and make sure that the cash flow projections, budgets, and forecasts drawn up when rates were lower are still relevant and appropriate in the higher-interest-rate environment. ‘If necessary, get guidance from a financial or business adviser on how to optimise your financial planning and adapt it to the current interest rate environment,’ he says.

5. Save as much as you can

High interest rates are not all bad. In fact, for the business that has surplus cash, they can be very good news provided that any spare money isn’t left in a transactional account but is invested in one of the many high interest saving and investment accounts designed specifically for businesses. However, Shannon warns business owners to make sure that any investments are made with a clear understanding of the future cash flow needs of the business in mind. ‘If you know that you need some liquidity to cover future operational or capital needs, then it’s not wise to put all your cash into a long-notice account that charges penalties for early withdrawal,’ he explains, ‘so you need to make sure that you plan your business savings carefully and, preferably, make allowance for emergency and liquid savings as well as a longer-term growth investment.’

6. Strengthen your credit management practices

Shannon recommends that SMEs maintain a proactive approach to credit management to make sure that they stay on top of outstanding invoices, streamline their collections, and negotiate suitable payment terms with suppliers. ‘By managing your cash flow effectively and minimising late payments, you reduce your dependency on expensive credit,’ he explains.

‘In times of high interest rates, it is crucial for small businesses to be vigilant and proactive in managing their finances and debt,’ Shannon concludes, ‘and by following these relatively simple guidelines, and possibly seeking out some professional business guidance, entrepreneurs can adapt their strategies, safeguard their operations and even continue to grow, despite the challenging economic climate.’

Nedbank is a proud National Partner of the NSBC

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