Many businesses, small and large alike, are making adjustments and strengthening their finances as a result of the RBNZ lifting the cash rate to 1.5% in April.

By the end of 2022, the cash rate, according to several economists, will hit 3%.

If you’re a small business owner, changing from a variable-rate to a fixed-rate loan and upgrading your cash flow projection tools are two ways to get ready for a shift in your finances.

Small businesses in New Zealand are experiencing cash flow issues as a result of changes to the official cash rate.

The official cash rate (OCR) was recently increased by the Reserve Bank from 1 percent to 1.5 percent, the greatest single rise since May 2000 and the fourth in a row. This returns the OCR to its pre-pandemic rate of June 2019, which was a record low at the time.

In this article, we examine the current state of the cash rate and review some of the actions businesses can take to strengthen their financial position in anticipation of potential future hikes.

What is the current state of the cash rate?

The interest rate levied on loans made between financial institutions is known as the OCR. Financial organisations frequently adjust loan interest rates to reflect changes in this rate in order to pass such changes forward to their clients.

Small businesses should prepare for further hikes in the cash rate before the end of the year.

Most analysts currently predict that the OCR will reach 3 percent by the end of 2022, with room for a minor increase in early 2023.

He justifies the reasoning behind forecast modifications.

An OCR increase is essentially an effort to control inflation expectations. However, a higher OCR currently means there is more room to cut again if the economy falters; thus, it may also provide some “insurance.”

Small business owners will need to budget for increasing financing costs over the next few years, just like the average homeowner.

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How do interest rates differ depending on the cash rate?

Financial organisations frequently pass on increasing loan interest rates to their clients by adjusting the interest rates they charge them. A fixed interest rate will not change; however, a variable interest rate frequently does so in response to changes in the cash rate. Therefore, taking up a fixed-rate loan ensures you won’t be negatively impacted by rising rates, even if the cash rate does change.

Fixed-rate loans

Some finance companies offer fixed-rate loans. This means that changes in the cash rate or anything else won’t have an impact on the loan amount at any point during the loan term.

A fixed-rate loan can be beneficial because it provides transparency on overall costs and helps small business owners create more realistic cash flow estimates. Fixed-rate loans are offered at an upfront price, so you are aware of the whole amount owing, including any interest, fees, or levies, before you take out the loan. The steps to securing a loan and you will often be able to access the funds within a very short period of time.

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What should proprietors of small businesses do in the current environment?

After two consecutive OCR rises, business owners and leaders are facing many changes to their priorities, difficulties, and plans.

One way of overcoming the challenges of OCR hikes is to focus on business growth and increasing sales. People who have an optimistic outlook for their company’s future in the next 12 months are more likely to be growth-oriented.

How would you go about preparing for the difficulties that could arise if you were a local firm facing the possibility of changes to the cash rate? You could utilise the following brief advice to get ready:

• It makes sense to start saving money now to increase your available cash reserves if you expect a substantial shift in your company’s financial situation in the near future.
• Cash flow management and forecasting. Improve your future cash flow estimates by updating your cash flow management tools.
• Change to a fixed price. To benefit from knowing that your repayments will remain the same even if the cash rate rises in the future, think about converting from a variable rate loan to a fixed-rate loan

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