What the cash rate is, how the recent increase can affect small businesses, and strategies and tips to business owners prepare for potential future increases.
At a glance
- The cash rate target has increased by 0.25 percentage points to 2.6% on 5 October 2022.
- This represents a 2.5 percentage point increase since November 2020, when the cash rate target sat at a record low of 0.1%.
- Prospa’s fixed-cost approach to loans means that Prospa customers aren’t affected by resultant increases to interest rates.
- Small business owners can respond to these challenges by boosting their cash flow and speaking with an adviser.
What is the RBA cash rate target?
The cash rate is the rate of interest charged on loans made between financial institutions. The target for the cash rate is set by the Reserve Bank of Australia (RBA) each month. As this rate changes, financial institutions often pass on those fluctuations to their customers via changes to loan interest rates.
After sitting at an all-time low of 0.1% since November 2020, the RBA raised the cash rate target in May 2022 for the first time in 18 months, citing high inflation, low unemployment and an expectation that wages would increase. It had already been on a downward trajectory prior to the pandemic, and hadn’t increased since 2010 – more than a decade ago.
Since then, the cash rate target has increased by 2.5 percentage points, most recently on 5 October by 0.25 percentage points, and now sits at 2.6%. The RBA board cited an attempt to tackle rising inflation as the key rationale for the October increase.
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How does the cash rate affect interest rates?
With an increase to the cash rate, financial institutions will usually pay higher interest on the money they borrow, so they often pass those higher costs on to their customers by increasing the interest rates they charge customers on loans.
While a variable interest rate will often vary depending on changes to the cash rate, a fixed interest rate will not. So taking on a fixed-rate loan means you are not adversely affected by higher rates even when the cash rate goes up.
Prospa’s fixed-cost loan
Some lenders – including Prospa – take ‘fixed interest’ a step further. Prospa’s fixed-cost approach means the amount of the loan isn’t affected by changes to the cash rate, or by anything else throughout the loan term.
“When you apply for a loan, all you really want to find out is: ‘What will this cost me?’,” says Beau Bertoli, Co-founder and Chief Revenue Officer at Prospa. “Our fixed-cost small business loans provide business owners with much needed clarity on the overall costs, and certainty for the duration of the loan.
“We prioritise transparency to make it easier for small business owners to manage the ups and downs of running their businesses and enable them to optimise their cash flow and forecasting.”
Tips for thriving amid a changing cash rate
Whether or not the cash rate target increases is out of a business’s control – but the way it responds to those changes isn’t.
There are several strategies small business owners can draw on when it does, such as:
- Make a cash flow forecast. A comprehensive cash flow forecast can give you a glimpse into the future of your business – and allow time to adjust in advance of peaks and troughs. Keep up-to-date with our cash flow forecast template.
- Boost your cash flow. If your forecast predicts a dip in cash flow, or to prepare for the unexpected, consider alternate ways to boost your cash flow, such as a small business loan or a line of credit.
- Review stock and pricing. Longshot Cafe is a small business that has made changes to its pricing and stock management to alleviate the impact of rising costs. Could a revised pricing strategy also work for you? Find out how they did it here.
- Speak to an adviser. At the end of the day, an expert knows best, so it’s best to contact a financial adviser. They can help provide insightful and practical advice to help fortify your small business against the ups and downs of the cash rate.
For example, Kristopher Meuwissen, director and founder of Wealtheon Financial Services, suggests a fixed-rate, rather than variable rate, loan when seeking business finance. “Fixed rates are extraordinarily advantageous in terms of knowing cash flow and understanding exactly what your interest payments will be,” he says.
This article was originally published in April 2022. In light of the recent increase to the cash rate, we’ve refreshed the article to provide further insight to small business owners.
Concerned about the possible impacts of cash rate increases? Speak with a lending specialist to find out how Prospa’s funding options can help you thrive even as the cash rate changes.
