Tighter financial conditions have arrived for small business owners as the Reserve Bank raised the cash rate by 25 basis points to 4.85 per cent, an increase that, according to the Council of Small Business Organisations Australia (COSBOA), “hits from three directions at the same time”.
Three simultaneous pressures
COSBOA CEO Skye Cappuccio described the impact bluntly. “Today’s rate rise is a hit for small business that arrives from three directions at once,” she said. “Customers will spend less, business loans will cost more and, for many owners, their home mortgage will cost more too.”
Many small business owners are also homeowners. The lines between their business finances and household finances have blurred. They face higher costs as both operators and borrowers, often with no clear separation between the two roles.
Inflation sits at 4.3 per cent, adding to the squeeze. “Inflation at 4.3 per cent is hurting everyone, including small businesses that have been absorbing higher costs for some time,” Cappuccio said. She acknowledged the difficulty of the task facing the Reserve Bank. “We recognise the difficult job the Reserve Bank of Australia has. At the same time, governments need to do everything they can to ease other pressures on small business, starting with not adding to them.”
Reduced discretionary spending
Spending cuts are the first point of impact. As households on variable rates face higher mortgage repayments, discretionary spending usually falls first. Retail, hospitality and personal services businesses feel this almost immediately.
“They will see it at the till,” Cappuccio said. This drop in customer spending reduces the top line for these businesses before any other costs are even considered.
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Margin compression and pay cuts
Higher borrowing costs also hit the cost of running the business itself. Lenders pass rate rises on to borrowers, landing on top of costs from previous increases. For businesses growing only in line with inflation, there is nowhere for that extra cost to go.
That extra expense must leave the margin or come out of the owner’s own pay. “For a business growing no faster than inflation, higher borrowing costs come straight out of already tight margins or the owner’s pay,” Cappuccio said.
The financial buffers for these owners are thin. The latest COSBOA and Square State of Small Business Report shows the typical Square seller grew revenue by just 3.9 per cent over the past year. Inflation was 3.8 per cent during the same period. The same data indicates 42.9 per cent of small business owners are working longer hours. One in four works for the same pay or less.
“These findings show small businesses are working harder just to hold their ground,” Cappuccio said. With growth barely keeping pace with inflation, there is little room left to absorb another increase in costs.
Double exposure through property
Around half of all small business credit in Australia is secured against residential property. This creates a double exposure for many owners. Their business finances and their household finances move in the same direction when rates rise.
Owners with this dual exposure face simultaneous pressure on cash flow. A rise in the cash rate affects both their business loan repayments and their home loan repayments at the same time.
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Pressure on the budget and regulation
Cappuccio called on the Federal Government to act when it releases its Mid-Year Economic and Fiscal Outlook (MYEFO). She wants reduced government spending and practical steps to help small businesses without adding further pressure to the Budget.
Small businesses already face added costs and complexity from Payday Super and the card surcharge ban. Proposed changes to discretionary trust taxation and the Digital Duty of Care Bill would amplify this pressure, Cappuccio said. She argued these proposals should not go ahead as drafted.
Energy costs also require attention. “Rising energy costs also need attention. There are practical options available to help small businesses manage these costs, and governments should be making them a priority,” she said.
The role of productivity
Small business owners have shown they will adapt and work harder through difficult conditions. “But their financial buffers are running low, and they cannot be expected to absorb every additional cost indefinitely,” Cappuccio said.
“Today’s rate rise reinforces why governments must focus on the pressures they can control, reducing spending, easing business costs, cutting unnecessary regulation and supporting productivity.”
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