Should I fix my interest rates?

Interest rates now look almost certain to go up – and up, and up. Following yesterday’s strong inflation figure, markets are now pricing in an 83% chance of a rate rise in November – and that’s just the beginning of the bad news.

Many economists believe we will see a second rise by early 2008, pushing the cash rate past the 7% mark. And earlier in the week John Stewart, the chief executive of NAB, indicated that banks may well implement their own interest rate hike in response to the squeeze on international financial markets.

For SMEs, the possibility of three interest rate increases in less than six months will ring alarm bells. But a knee-jerk move to lock in a fixed rate at this point in time won’t necessarily help, according to Andrew Faulkner, a partner with Adelaide accounting firm Lamberts Hall Chadwick.

Faulkner points out that fixed rate loans take into account interest rate rises that, like those we currently face, are already foreseen by the market. 

“All that is really doing is making sure you know what your requirements are going to be. It won’t necessarily save you money,” Faulkner says. “And, of course, overdraft rates are always going to be variable, which will be a bigger issue for many businesses.”

There are steps SMEs can take to minimise their exposure to rising rates, however. Faulkner advises business to:

• Take the opportunity to shop around for the best possible deal for your debt – banks and financiers are always looking for good business to lend to.
• Make your cash flow position solid to limit your need to use overdraft facilities – and the high overdraft interest rates that come with them.
• Review your credit and supply arrangements – remember, higher interest rates will affect your customers and suppliers as much as you.

Peter Larsen, Suncorp’s executive general manager of small business banking, says SMEs should consider taking the following steps:

• Don’t let cash lie around earning little or no interest.  If you have a business loan, use a business offset account to minimise the amount of interest paid on the loan.
• To speed up cash flow, make sure your EFTPOS terminal provider settles every day of the week.  Businesses can lose thousands every year by not receiving EFTPOS settlements over the weekend.
• Sweep the funds from cheque accounts into a linked high interest account.  Use the linked high interest account to make electronic payments such as payroll.