Over the last four decades, inflation rates in Australia and New Zealand have declined drastically but steadily as their economies have rapidly developed and globalised. While the current low rates are indicative of a strong and stable economy, this trend could turn out to be quite problematic for SMEs in the region.
In an otherwise stable economy, small businesses may well find themselves in an environment where financing options are relatively scarce in the coming years. To maintain your access to the cash flow solutions you need to keep the lights on, a bit of financial savvy and a close relationship with your financial institution might make all the difference.
How does inflation tell us about the economy?
Inflation is the measure of how much the value of a currency decreases over time in response to supply and demand. Rapid inflation would suggest that the amount of currency available is growing relative to the supply of goods available to be bought with it. Negative inflation (or deflation) would be the opposite. With relatively high inflation, people and businesses have more incentive to spend their money, to deposit it in a bank that will pay interest on it, or to put it to work on another investment in order to avoid just holding onto those dollars as they become less valuable.
Low inflation, on the other hand, removes this incentive and makes it less risky to save money. It drives down interest rates, often resulting in fewer deposits, and generally slowing the growth of the economy in general. While that makes low inflation look like an inherently bad thing, it’s usually also an indicator that things have been going very well, and that the economy is generally stable.
What has been driving down the inflation rate?
Inflation rates are driven down when the the quantity of goods supplied rises in comparison to the available currency. In the case of both New Zealand and Australia, that’s exactly what has happened. Globalisation, automation, and innovation have driven down production costs, and increased the supply of goods available to consumers. While the latest projections suggest this process may slow soon, we are likely to continue to see even lower rates of inflation in the coming years.
The fallout for small business
For small business owners this might seem relatively irrelevant, until they call their lender to get financing to pursue a growth opportunity or to deal with a budget shortfall. In order to prevent deflation, central banks will keep interest rates low, which makes it more difficult for banks to attract deposits and to be profitable in the long run. While it’s technically cheap to borrow money, it can become more difficult to actually get a loan in the first place, because the supply of currency is low.
To succeed in this type of economic environment and get access to the funds you need on short notice, entrepreneurs need alternative financial solutions and backup plans.
Developing alternative solutions
When financial institutions have to be very discerning about who they can afford to issue financing to, it becomes particularly valuable to build a high-touch relationship with your financial partner. That existing relationship makes it far easier for your financial institution to evaluate you with a nuanced perspective, and to approve your application in a timely manner.
Here at Fifo Capital, every client works with a dedicated representative who knows and understands your particular situation, and who can work with you to find the right solution no matter what the economy is doing right now. Moreover, there are some general tools that institutions like Fifo can offer businesses that can help them to maneuver around the issue of low interest rates to get access to financing.
Free standby finance facility
A standby finance facility is effectively just a regular business loan, but it comes with a critical advantage. Instead of negotiating terms under pressure and crossing your fingers that you’ll get approved and can access to the funds you need in time, you can set it up ahead of time, and finish taking out the loan at some future date.
Invoice factoring
Unlike traditional loans, invoice factoring is offered for a fee represented by a portion of the collected revenues. This makes it a reliable source of profit even when inflation is particularly low. That means it’s very likely to remain available as an accessible way to get access to short term financing quickly even when other options have disappeared.
While taking out a traditional loan might become more difficult, businesses will by no means be out of options. By working together closely, we can make sure your business has the financing you need when you need it. Give us a call today to learn more!
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