Small business owners in Australia are feeling the financial squeeze again as interest rates remain high, affecting consumer demand and making it more expensive to borrow money.
After many had anticipated a rate cut in the second half of the year, the RBA has so far resisted the pressure to reduce interest rates, despite low inflation in most parts of the economy. This is because of stubbornly high inflation in a few sectors, including insurance, rents and utilities. The official cash rate is currently at 4.35 per cent, which is the highest since 2011.
The RBA noted in its June board meeting minutes that its key focus for now is on interest rates that will ensure inflation is contained within the target band of 2 to 3 per cent.
This situation is creating challenges for many small businesses. “People are spending less on non-essentials, and our costs have gone up,” said Melinda Tran, the owner of a family-run cafe in Brisbane. “Prices for everything from milk to electricity are higher, and the loan repayments are hurting our cash flow.”
In a report this month, the Australian Small Business and Family Enterprise Ombudsman found that almost 40 per cent of small businesses were struggling to keep up with their loan repayments. Many were reprioritising expenses, delaying growth plans, or downsizing to get through this period.
Retailers, cafes, restaurants and builders have been hit hard, with many reporting that orders and foot traffic have slowed since early 2024. This is despite the fact that the economy has not entered a recession.
Small businesses with variable-rate loans have seen their repayments increase by an average of $1000 a month over the past 18 months.
Economists expect the RBA to keep rates at their current level until it is convinced that inflation is moving sustainably within the target band. The key data points for this will be whether services inflation and wage growth will decline.
On that front, there are mixed signals. Headline inflation has come down from its peak in 2022 but services inflation has remained sticky, as have wages growth.
In the meantime, business owners are being encouraged to revisit their budgets, seek advice and look for ways to generate more revenue. Some are using digital technology and automation to reduce operating costs, while others are focusing on more profitable products.
“Resilience is the buzzword that we’re hearing a lot,” said James Corcoran, a business adviser in Sydney. “But it’s a challenge when you’re faced with both weak demand and high costs at the same time.”
The Federal Government has taken note of this and last week opened up access to low-interest loans for small and family businesses that are eligible.
What’s ahead?
The latest data on household consumption and business credit released by the RBA last week shows that the high-interest-rate environment has taken a toll on the economy.
Retail sales have been subdued in the past year, and credit to businesses has slowed. However, some economists have pointed to signs that this may change soon, noting that inflation has now eased and the latest retail sales figures have been better than expected.
Consumer and business confidence are also slowly picking up, which could signal that spending will increase in the coming months.
This could support an earlier rate cut, although the risk of a further shock to the housing market could still prevent the RBA from moving rates too quickly.
RBA Governor Michele Bullock and her fellow board members have repeatedly said that they do not intend to cut interest rates until there is a clear sign that inflation is easing.
But after two years of rate increases and a very high cash rate, small businesses are feeling the strain.
James Corcoran said that the RBA should give them some relief. “I think it would be fair to say that many in the small business community would like to see rates go lower, so they can get some breathing space,” he said.
Most businesses have been through tough periods in the past and many are prepared to do what it takes to succeed. But they hope that they don’t have to wait too long for some relief.
