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Given the tough economic conditions that SMEs are already facing, the increase in interest rates will add more pressure by making debt more expensive, explained Sanjeev Orie, CEO of business value adds at FNB Business.
Profit margins are also likely to be impacted in the long term due to a lower demand from consumers that will tighten their belts as disposable income decreases.
For most of the middle class consumers, a rate hike typically means an increase in mortgage and vehicle repayments. This means that businesses that are highly geared and operating on low margins may struggle to service their debt commitments.
“As a result, small businesses may run into cash flow problems, making it difficult for them to manage running costs and payments to staff and suppliers for goods and services. Moreover, the possibility of further interest rate hikes next year will require SMEs to place more emphasis on their annual cash flow forecasts and regularly review them as business conditions change,” said Orie.
“Difficult trading conditions coupled with natural resources constraints are likely to make things more difficult for SMEs in the coming year. SMEs in the import and export sector are also being heavily hit by the depreciation of the rand, made worse by the combined effect of rising inflation.”
Higher interest rates could also discourage businesses from expanding as the cost of expansion becomes increasingly more expensive. Most start-up businesses have little equity and rely on debt.
However, Orie pointed out that businesses with low gearing and high levels of excess cash may benefit from high interest rates since the excess cash can be invested for a higher return.
READ: Pain for consumers as SA hikes interest rates
Franchises
For any franchisee or franchisor an increase in interest rates will mean that the cost of borrowing rises and will also mean an increase in the monthly expenses, according to Morné Cronjé, head of FNB Franchising.
A rise in interest rates discourages investment in the franchise industry and makes it difficult for franchisees to borrow money to finance their operations, payroll and general purchases.
“Franchise owners need to be savvy and come up with real ways to increase their cash flow and cut unnecessary expenses. The more you understand the fundamentals to maintaining your business, the more likely it will survive. The interest rate increase will ultimately put additional pressure on an already stretched South African consumer,” said Cronjé.
Franchise concepts eventually evolve with time due to global influence and trends.
“Franchisors should be aware of the volatile economic environment and tweak their business plans where needed. While the franchising industry is expanding in various sectors such as fast food and retail we need to ensure that franchises remain relevant and if in debt seek professional help,” he said.