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Durban - Businesses should examine their budgets and re-evaluate their loan instalment plans, ahead of the next monetary policy committee (MPC) meeting on May 20-22, when Reserve Bank governor Gill Marcus will likely implement an interest rate hike.
This is according to Gary Palmer, CEO of Paragon Lending Solutions, who believes we are entering a climate of interest rate hikes in 2014.
“It was a welcome surprise when they left the interest rate unchanged [at 5,5%] at their last meeting in March,” he told Fin24.
“And it was wise of them to warn of an increase in the medium term, as this allows both businesses and consumers to plan ahead. There is nothing worse than unpredictability in an economy, so by knowing what’s ahead, business can plan their budgets realistically.”
South Africa's repo rate is set and reviewed by the MPC to curb inflation of the rand, taking into consideration domestic and global environments that impact on the the unit. Issues around mining in South Africa and the future of Ukraine are top of mind currently, and could impact on the repo rate.
Prepare a pricing strategy for your busines
Businesses are indirectly affected by interest rate hikes as consumers tend to spend less because they too are affected by rate hikes through increases to credit cards and mortgage interest rates, explained Palmer.
Businesses are directly affected as the cost of borrowing from banks is likely to increase and may cause a longer-term slowing of purchases.
“Business owners should therefore consider a pricing strategy in anticipation of rate changes, including when to purchase property or a large supply of goods needed, or when to reduce the amount of purchases in the case of a dry spell in profits,” said Palmer.
Nicholas Nkosi, head of Standard Bank Personal Vehicle and Asset Finance, adds that with all the increases in repayments the customer is left with less disposable income to survive on.
“This may lead to financial setback to the customer as people are unable to maintain the lifestyle they used to enjoy,” he told Fin24.
“An interest rate hike means there will be an increase in the instalment paid by the consumer on debts where rates linked to the prime lending rate were selected. This applies to all debts that the customer may have which was acquired through financing.”
Nkosi had good news for businesses that chose a fixed rate contract, as there will be no impact on them because repayments will remain fixed for the duration of the arrangements made.
Open communication is key
If your budget shows there is a possibility that further hikes this year will impact negatively on your loan repayments, Palmer suggests you set up a meeting soon to communicate clearly with your broker or banker about the scenarios.
“There is nothing worse for a lender than a client who does not communicate,” said Palmer. “Open communication is key so lenders can assist in finding solutions ahead of any foreseeable problems.”
If you don’t plan accordingly, a small increase in the interest rate can radically alter your financial situation and cause unforeseeable stress, says Palmer. “Adding one percent to the cost of borrowing can result in businesses defaulting,” he said.
Nkosi agrees: “The key to financial success is planning,” he said. “Planning for the unforeseen - not only interest rate hikes but also the general variable costs such as maintenance and upkeep associated with an asset.”
Property margin squeeze
Commercial property owners will definitely feel the stress with the increase, as they are battling due to a margin squeeze, according to Palmer.
“There has been an escalation in costs for property owners due municipal costs nearly doubling over the past five years,” he says. “Tenants are also battling due to the pressure from a slow economic recovery. They often can’t afford rental increases, so owners are absorbing that cost to avoid vacancies.”
Planning the hikes into your budget could result in the sale of commercial property to offset the stress of further increases in loan repayments. Palmer says the key to property is to sell when you want to sell, not when another party wants you to sell.
Should a bank require you to sell you property, there is a strong possibility that you will obtain less for it than if it were sold in a timely manner with no distress.
“If your property is worth R3m, you should be able to get that amount if you sell on your terms,” Palmer said. “If the bank sells that property, you will only get R2m for it.”
Buying a new asset in this climate
In financing a new asset, explains Nkosi, business must consider if the cash flow can afford monthly repayments to cater for cash flow stress testing and to understand the impact of variable increases such as interest rate increases.
“Upfront deal structuring to suit the financial the specific needs is always an important factor in selecting the most appropriate financial offering,” he says.
“These factors include whether the business wants to own or rent, over what period this finance will be, and whether a deposit/residual value or balloon payment is structured into the deal. Also remember to take into account the other costs associated with owning and running a vehicle, such as fuel costs, insurance, tolls and maintenance.”
At no stage should insurance be cancelled, warns Nkosi, as this will compromise the contract with the financial institution and put the business at risk of further financial difficulties in the event of a loss.
“Approach your financial institution upfront when affordability is under pressure to seek alternative offerings,” he said.
Monetary Policy Committee meeting dates for 2014 are:
20 - 22 May 2014
15 - 17 July 2014
16 - 18 September 2014
18 - 20 November 2014
According to the MPC, it considers various factors that influence inflation in reaching its interest rate decision, such as:
• Changes in administered prices;
• Changes in wages, productivity and unit labour cost;
• Components of domestic and external demand;
• Exchange rate developments;
• Money supply and credit extension; and
• Oil prices; and the expected output gap (the gap between actual and potential output).
- Fin24
* Share your experience of setting up your business and get published or simply ask a question. Our business panel can put you on the right path.
This is according to Gary Palmer, CEO of Paragon Lending Solutions, who believes we are entering a climate of interest rate hikes in 2014.
“It was a welcome surprise when they left the interest rate unchanged [at 5,5%] at their last meeting in March,” he told Fin24.
“And it was wise of them to warn of an increase in the medium term, as this allows both businesses and consumers to plan ahead. There is nothing worse than unpredictability in an economy, so by knowing what’s ahead, business can plan their budgets realistically.”
South Africa's repo rate is set and reviewed by the MPC to curb inflation of the rand, taking into consideration domestic and global environments that impact on the the unit. Issues around mining in South Africa and the future of Ukraine are top of mind currently, and could impact on the repo rate.
Prepare a pricing strategy for your busines
Businesses are indirectly affected by interest rate hikes as consumers tend to spend less because they too are affected by rate hikes through increases to credit cards and mortgage interest rates, explained Palmer.
Businesses are directly affected as the cost of borrowing from banks is likely to increase and may cause a longer-term slowing of purchases.
“Business owners should therefore consider a pricing strategy in anticipation of rate changes, including when to purchase property or a large supply of goods needed, or when to reduce the amount of purchases in the case of a dry spell in profits,” said Palmer.
Nicholas Nkosi, head of Standard Bank Personal Vehicle and Asset Finance, adds that with all the increases in repayments the customer is left with less disposable income to survive on.
“This may lead to financial setback to the customer as people are unable to maintain the lifestyle they used to enjoy,” he told Fin24.
“An interest rate hike means there will be an increase in the instalment paid by the consumer on debts where rates linked to the prime lending rate were selected. This applies to all debts that the customer may have which was acquired through financing.”
Nkosi had good news for businesses that chose a fixed rate contract, as there will be no impact on them because repayments will remain fixed for the duration of the arrangements made.
Open communication is key
If your budget shows there is a possibility that further hikes this year will impact negatively on your loan repayments, Palmer suggests you set up a meeting soon to communicate clearly with your broker or banker about the scenarios.
“There is nothing worse for a lender than a client who does not communicate,” said Palmer. “Open communication is key so lenders can assist in finding solutions ahead of any foreseeable problems.”
If you don’t plan accordingly, a small increase in the interest rate can radically alter your financial situation and cause unforeseeable stress, says Palmer. “Adding one percent to the cost of borrowing can result in businesses defaulting,” he said.
Nkosi agrees: “The key to financial success is planning,” he said. “Planning for the unforeseen - not only interest rate hikes but also the general variable costs such as maintenance and upkeep associated with an asset.”
Property margin squeeze
Commercial property owners will definitely feel the stress with the increase, as they are battling due to a margin squeeze, according to Palmer.
“There has been an escalation in costs for property owners due municipal costs nearly doubling over the past five years,” he says. “Tenants are also battling due to the pressure from a slow economic recovery. They often can’t afford rental increases, so owners are absorbing that cost to avoid vacancies.”
Planning the hikes into your budget could result in the sale of commercial property to offset the stress of further increases in loan repayments. Palmer says the key to property is to sell when you want to sell, not when another party wants you to sell.
Should a bank require you to sell you property, there is a strong possibility that you will obtain less for it than if it were sold in a timely manner with no distress.
“If your property is worth R3m, you should be able to get that amount if you sell on your terms,” Palmer said. “If the bank sells that property, you will only get R2m for it.”
Buying a new asset in this climate
In financing a new asset, explains Nkosi, business must consider if the cash flow can afford monthly repayments to cater for cash flow stress testing and to understand the impact of variable increases such as interest rate increases.
“Upfront deal structuring to suit the financial the specific needs is always an important factor in selecting the most appropriate financial offering,” he says.
“These factors include whether the business wants to own or rent, over what period this finance will be, and whether a deposit/residual value or balloon payment is structured into the deal. Also remember to take into account the other costs associated with owning and running a vehicle, such as fuel costs, insurance, tolls and maintenance.”
At no stage should insurance be cancelled, warns Nkosi, as this will compromise the contract with the financial institution and put the business at risk of further financial difficulties in the event of a loss.
“Approach your financial institution upfront when affordability is under pressure to seek alternative offerings,” he said.
Monetary Policy Committee meeting dates for 2014 are:
20 - 22 May 2014
15 - 17 July 2014
16 - 18 September 2014
18 - 20 November 2014
According to the MPC, it considers various factors that influence inflation in reaching its interest rate decision, such as:
• Changes in administered prices;
• Changes in wages, productivity and unit labour cost;
• Components of domestic and external demand;
• Exchange rate developments;
• Money supply and credit extension; and
• Oil prices; and the expected output gap (the gap between actual and potential output).
- Fin24
* Share your experience of setting up your business and get published or simply ask a question. Our business panel can put you on the right path.
