<strong>By: Business Partners Limited</strong>

While there has been a great deal of focus this year on the difficulties faced by local businesses, given the current tough economic conditions, the Reserve Bank’s announcement of an interest rate cut of 25 basis points to 6.5%, the <a href="https://www.fin24.com/Economy/sa-interest-rates-may-fall-and-not-due-to-politics-20190717" data-saferedirecturl="https://www.google.com/url?q=https://www.fin24.com/Economy/sa-interest-rates-may-fall-and-not-due-to-politics-20190717&amp;source=gmail&amp;ust=1563861878799000&amp;usg=AFQjCNH6_6IBqbmuBIDwwvHYeqykb9slPw">first easing since March 2018</a>, comes as a welcome relief for cash-strapped businesses.

According to David Morobe, Executive General Manager: Impact Investment at Business Partners Limited (BUSINESS/PARTNERS), the impact that the interest rate cut has on businesses is two-fold. “Lower interest rates will impact businesses favourably, as debt will become less expensive to pay off.  In addition to this, a rate cut is likely to stimulate consumer spending, leading to an overall healthier operating environment for many businesses.”

Morobe says that in this environment, business owners who can afford to accelerate their debt repayments should definitely do so. “By paying higher instalments, business owners can reduce the payment term significantly. Where possible, business owners should see this as a golden opportunity to get rid of some of their debt sooner.”

Morobe adds that the increased cash flow available to business owners due to the interest rate cuts opens many doors for businesses. “Additional cash flow, however little, relieves pressure and also gives businesses the freedom to expand or reduce costs. The temptation to spend this additional cash flow should be resisted, and rather it should be used to reinvest in the business or build up a nest egg, which most businesses are not usually able to do.”

Finally, Morobe explains that a cut in interest rates will likely have a positive effect on consumers’ spending behaviours, which will indirectly impact the bottom line of many businesses, particularly those that are consumer-serving. “Consumers will likely have a bit more disposable income to spend on services and products, which businesses should capitalise on.

“While the interest rate trend is downward for the time being, the possibility always remains that rates will increase again over a period of time. As such, business owners should ensure that they make use of this window as best possible,” concludes Morobe.