It’s no doubt that high interest rates have affected many Australian individuals and businesses. However, small businesses are some of the hardest hit.
Rising interest rates have had a cascading, negative effect on SMEs. With low consumer confidence and rising supply costs, small businesses face a challenging time running their businesses, retaining staff, and paying off creditors.
Luckily, there is a possible solution for small businesses to manage their financial burden: Small Business Restructuring (SBR).
In this article, we’ll explore how small businesses are affected by high interest rates, offer possible forecasts on interest rates, and propose how SBR can be used for businesses in financial distress.
The domino effects of rising interest rates
Australia’s cash rate is currently at a 12-year high of 4.35% since November 2023. For small businesses, it has caused a ripple effect on many fronts. Here are some of the domino effects we see caused by a high interest rate environment:
- Cost-of-living pressures resulting in low consumer confidence and spending
- Increased cost of materials and supply
- Rising labour costs
- Increased rents from landlords
- More pressure from creditors such as the ATO and banks
- Overall higher operational costs (i.e. superannuation requirements)
Consumer confidence has been at a record low for two years, indicating one of the longest times of customer despondency in history. Additionally, SMEs account for the biggest amount of debt owed to the ATO (around $20 billion), which resulted in aggressive debt-chasing by the tax office. These are the two biggest factors contributing to business insolvencies we know.
The number of companies appointing administrators was at an all-time high in March at 1144. This figure is a 26% increase YoY and would be the first time since 2025 that insolvencies were above 1000 in a month.
According to the Australian Securities and Investments Commission (ASIC), company insolvencies are set to hit 10,000 in 2023-24, the highest level in a decade. This level has not been seen since the 2012-2013 financial crisis.
Retail, hospitality, and construction sectors are hit the worst. Data shows that when combined, all three sectors account for about 50% of all insolvencies in Australia.
Faced with supply chain issues and a severe labour shortage, construction companies that entered insolvency were 32% higher than last year. Meanwhile, retail and hospitality both recorded a 49% increase in companies collapsing due to tight margins.
Is the interest rate going to be cut?
An interest rate cut would be welcomed news for many small businesses, but when can they expect it?
Estimates by industry experts and economists are varied. Originally, interest rates were forecasted to be reduced by the RBA in September, but this has now been pushed back in November due to a stronger-than- expected March inflation figure.
Annual CPI inflation rates for the March 2024 quarter have come in at 3.6% and increased by 1% per quarter. This is a higher than the expected 3.5% annual increase target.
However, the Australian Bureau of Statistics (ABS) showed retail spending fell much larger than expected at 0.4% in March. It highlights the weakest spending on record since the introduction of GST and during the pandemic period.
The current sentiment is that interest rates will be retained at 4.35% until November. However, Judo Bank chief economic adviser and top forecaster Warren Hogan has warned that the RBA might need to increase interest rates to a further 5.1% due to the strong inflation numbers.
So how can small businesses stay ahead of the high interest rates, and a possible rate increase? By restructuring their debts in the Small Business Restructuring program.
Finding a solution in Small Business Restructuring
The Small Business Restructuring (SBR) regime allows SMEs to restructure their business by entering a restructuring plan with their creditors. In this framework released by the Australian Government, company directors can remain in control of their company and keep it operational instead of giving all control to a restructuring practitioner.
SBR offers many benefits to company directors as compared to filing for voluntary administration. It also prevents small businesses from prematurely placing their companies into liquidation.
With the less-than-favourable interest rates, small businesses have been faced with a prolonged period of business spending and reduced consumer demands. Many small businesses who have been called by the ATO to repay their legacy debts are now dealt with three choices: pay, restructure, or close.
SBR allows a company to restructure their debts, reduce them, and gain more time in settling them. It can offer a significant relief in cash flow and possibly improve the balance sheet for many businesses.
SBR efforts have been exceeding voluntary administrations and court liquidation, indicating that small businesses are becoming proactive in settling their debts. ASIC also states that restructuring and court liquidation appointments increased more than 3 times compared to nine months ago.
Key takeaway
In a high inflationary environment, Small Business Restructuring is a highly viable method for improving a company’s financial position and paying off creditor debts. However, acting early by speaking to a restructuring expert is the best way to ensure that the business is minimally impacted by rising interest rates.
Olvera First helps businesses stay ahead in a dynamic environment with bespoke restructuring solutions. Explore our blog for more insights on navigating the financial complexities of this dynamic industry.
References:
- Rising land taxes and interest rates force landlords to increase rents, hurting distressed business
- Business collapses hit record, jobs market stays strong
- Australia regulator flags surge in company insolvencies to 11-year high
- Insolvency ‘tsunami’ worst since GFC as debts cripple businesses
- Insolvencies grow as businesses bear the brunt of an economic ‘perfect storm’
- Annual inflation slows to 3.6 per cent as higher than expected price rise in March quarter rules out early rate cut hopes
- RBA to lift cash rate to 5.1pc, says top forecaster
