The interest rate demystified: part 2

Earlier this month, 3Cube Property Solutions published an explanatory article about the interest rate, detailing what it is, how it works and how it affects consumers. In part 2, we're approaching the interest rate issue from a business perspective, breaking down what hikes and falls mean for businesses.

The impact of low or falling interest rates

First things first: a reduced repo rate means less interest payable on business loans and credit facilities. If your business has existing debt, you'll see a slight decrease in your monthly repayments. This in turn frees up capital for expansion or added operational needs - and as companies expand, they need more staff. This in turn lowers the unemployment rate. Low interest rates also help the economy as a whole, as they lead to job creation and higher consumer spending.

The fact that loan repayments are smaller doesn't mean businesses should take their focus off managing debt wisely. When interest rates are lower, it's a great chance to consolidate high-interest debt and explore refinancing options that support your long-term financial objectives.

When interest rates are low, businesses will find it easier to invest in assets like new technology and infrastructure. These are also ideal times to consider workforce expansion or new projects that will help to ensure the business's long-term financial sustainability. An important factor to note is that interest rates fluctuate regularly and by keeping up to date with the news, you can normally get an inkling of when interest rates that have been falling are set to stabilise or start rising. This allows businesses to prepare for a turn in the tide with higher debt repayments and lower available investment capital.

There are certain industries that enjoy particular advantages when the interest rate is low. Retail and hospitality are great examples because consumer spending tends to be higher when the interest rate is low. Construction and real estate are further examples of industries highly dependent on credit availability.

How climbing interest rates can hurt (or help) businesses

In an article written for Business Insider, a US-based Chartered Financial Analyst, Andrew Glaze, shines the spotlight on how rising interest rates can either hurt or help businesses, depending on their circumstances. While one may not think that interest rate hikes can ever be advantageous for businesses, Glaze points out that businesses with large amounts of capital or cash investments benefit when the interest rate rises because they can invest this cash and earn higher interest on it.

Over and above this, businesses with negative working capital can benefit from higher interest rates. Simply put, negative working capital means that a company has more short-term debts than short-term assets. Glazes cites the example of Booking.com, where customers pay in advance for holiday accommodation. The excess cash on such businesses' balance sheets earns a greater return when the interest rate is higher. On a similar note, a rising interest rate is likely to boost demand for certain financial services. This means that banking and associated services may get a boost from interest rate hikes.

There are various steps that businesses can take to compensate for rising operating costs when interest rates increase. Firstly, where possible, businesses should reduce their debt levels by repaying loans or negotiating lower interest rates where possible. Secondly, improving cash flow is an important step. This can be done by increasing sales, reducing costs where possible or taking payments more efficiently.

In the era of artificial intelligence, considering what problems could be fixed through automation or the adoption of new technology is a worthwhile undertaking. A fourth idea is to focus on expanding your business into new markets or adding to your existing product offering.

Practical steps businesses can take to remain financially stable during interest rate hikes include improving your cash flow forecasting and optimising processes related to accounts receivable and payable. By being proactive when the interest rates are low and building a cash reserve, you can help your business to weather whatever storms may lie ahead.

The current interest rate forecast

Experts are divided in their opinions about how South Africa's interest rate will fare for the rest of 2025. While some feel that only one more interest rate of 25 basis points is likely, others believe that a rate cut of 50 basis points is the right course of action. With the Monetary Policy Committee set to meet imminently, we will soon know what the immediate future holds for the interest rate.

Whether the interest rate is rising or falling, one thing remains constant: in order to thrive, a business needs the right premises. Get in touch with 3Cube Property Solutions if your business needs commercial, industrial or retail space in Gauteng or the Western Cape.