Rate rises put focus on debt handling

By MATTHEW BELLINGHAM*

The inevitable has happened - interest rates are going up.

The steady climbs of past months show businesses should prepare themselves for more rate rises or risk being caught out.

We have enjoyed a low interest rate environment for a while now. Rates progressively fell to a point where they did not have much room left to fall.

As the fall continued, the speculation increased: surely they must start to go back up sooner or later? That time has arrived.

With this low rate environment, the level of debt held by businesses has increased, as has their willingness to take on debt.

With rates starting to increase and the likelihood of more rises, now is the time to review your debt position. Take a look at your debt levels, how your loans are packaged, the interest rates you are paying, and your likely future requirements. You cannot afford to be complacent.

Here are a few things to consider.

* Getting your debt mix right. You may have a mix of debt including overdrafts, term loans, interest-only loans, leases or commercial hire purchase. Sometimes your debt mix can get out of sync and you end up paying much more interest than necessary.

Your debt mix will affect both the cost of your borrowings and the level of cashflow required to service capital repayments. Get these wrong and they will put pressure on profitability and cashflow.

So it is a good idea to review the mix to make sure you have the right balance.

* Fixed or variable rates? This is a common question. Is it time to lock in any of my interest rates?

You need to make this decision based on your individual circumstances. If you are highly geared and could be hit by any sudden upward movement in interest rates, it may be worth considering locking in the rates on some of your debt.

The lower the level of gearing, the less significant this issue may be for you.

* Better financial management. Irrespective of the present interest rate environment, this will always be a winner for you.

If you can drive down your borrowing needs by better management of your assets, including your debtors, stock and work in progress, this will improve your profitability and your cashflow position. It is all about getting the most out of your business.

* Don't overcommit yourself. Too many businesses get caught out by overtrading - doing more than their resources and capital base will reasonably allow. An increasing interest rate environment will certainly put the acid on any business in this situation.

It would be great if we each had a crystal ball so we could predict future interest rate movements. Unfortunately none of us do.

Smart financial management and a risk management approach to your business will always pay dividends.

And talk to your financial adviser. Independent advice is always a good investment.

* Matthew Bellingham is director of accounting and business advisory firm Hayes Knight.