Rising Interest Rates a Challenge to SMEs

Updated on 21 July 2014

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Rising interest rates a challenge to SMEs

SMEs face another uphill battle to stay in business in the current tough economic times with the rising interest rates cycle.

“Following the end of a cycle in which the South African Reserve Bank (SARB) kept interest rates at their lowest levels in decades, the current trend will be a challenge for various sectors of the South African economy”, said Lee Bromfield, CEO of Core Lending at FNB.

According to Bromfield, the rise in interest rates will have an impact on SMEs in the short term, as it affects the entire ecosystem that the sector needs to flourish.

Bromfield explains that even though the decision to hold interest rates came with a cautionary, it provided small to medium-sized enterprises (SMEs) a small window to potentially make ground in reducing debt before the next monetary policy meeting.

The interest rate hike means SMEs with loans linked to the prime lending rate will have to pay more to service their debt, and those with business property bonds will now pay higher monthly instalments.

Interest rates are on the rise again

The latest Monetary Policy Committee (MPC) announcement saw the repo rate increase from 5.5% to 5.75%. This is the second time that rates have been increased in 2014, after having remained flat for just over 18 months.

The upward trend in interest rates comes on the back of rising inflation, high consumer debt levels and a contracting economy. With economic conditions remaining tough, the main question is whether the state of the economy threatens the survival of SMEs that are currently operating.

Read Also: A Guide to Navigating SME Financing in South Africa

‘No need to panic’

According to Bromfield, even though the South African economy is in a precarious state, there is no need to panic.

“Economic pressure is something that every business needs to absorb effectively, and small business is no different. However, during this period, businesses need to limit over-exposure to debt and work closely with their bank to ensure that the business remains sustainable.”

Bromfield says one of the unfortunate trends they often see is that business owners tend to wait until their business is in trouble before they contact their bank for a solution.

“Do not wait until the last minute to seek a solution to your debt. The best that a small business owner can do is to work with their bank to evaluate the impact of the change in interest rates on their repayments.

“The only option at this stage is to ‘tighten the belt’ by containing costs and cutting unnecessary debt. Getting rid of needless debt within a short period should be a key priority for any small business,” he says.

Small business ministry

Recently, the South African small business sector received a vote of confidence when the government established a Ministry of Small Business Development. The move is said to position the small business sector as one of the catalysts to the country’s economic growth.

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