SMEs must pay attention to the Reserve Bank’s warning that interest rates cannot be held down indefinitely
Small businesses could be facing a ‘perfect storm’ due to a combination of rising fuel, electricity prices and increasing interest rates - factors which could place a strain on the viability of many small businesses.
Ethel Nyembe, Head of Small Enterprise at Standard Bank, says “Many small businesses have seen their cash flow negatively impacted due to their businesses being interrupted by load shedding. These sales opportunities, once lost, can rarely be regained.”
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“The fuel price, which was recently adjusted to accommodate a larger Road Accident Fund (RAF) levy, could be under pressure again as the value of the rand has dropped against the US dollar. Furthermore, a significant electricity price hike application being considered by the National Energy Regulator of South Africa (NERSA), and the possibility of interest rates rising, has set the scene for hard times in the SME sector.”
SME’s struggling in a fragile economy
Nyembe adds that the announcement by Reserve Bank Governor, Lesetja Kganyago, that the inflation outlook is deteriorating and economic growth is remaining fragile, has major implications for SMEs.
Many are already struggling to survive in an environment where cash flow is under pressure and competition for shrinking market share is reducing profit margins.
“The Governor has given all businesses a respite by keeping the repo rate at its present level of 5.75%. However, SMEs must pay attention to his warning that rates cannot be held down indefinitely. We have been fortunate to have rates at their present levels for an extended period, but SMEs should begin bracing themselves for the fact that a rise is inevitable,” cautions Nyembe.
“It has been predicted that an interest rate change could be on the books as early as July. Even a 25 basis points increase in the rate could have serious consequences for SMEs that are struggling. Many are also contemplating wage and salary hikes with workers that will also place a strain on budgets.”
Nyembe says “It is unfortunate that when Eskom hikes rates, city authorities, who act as distributors, also increase their retail rates. This is added to the Eskom rate, leaving merchants facing costs that are usually significantly higher than the announced rate.”
Finding innovative ways to reduce costs
SMEs operate in a tough economic environment and, unfortunately, passing on costs to consumers is getting harder.
Therefore, small business owners have little option other than to find ways of reducing operating costs, becoming more efficient in their business operations, reducing waste and leveraging on new technology to maximise their sales opportunities.
Where they are located in malls or smaller shopping centres, this will mean making an investment in a generator, so that they can operate during power outages.
Related: How to keep your business up and running during load shedding
“Many will want to avoid further borrowing, but power shortages will be with us for some time to come. Using a short-term loan to add business hours to the working day could be a worthwhile investment,” says Nyembe, adding that Standard Bank now offers generator finance as a result of many of its small business customers losing money due to load shedding.