Record low borrowing costs are a precious opportunity for business owners who now need to make savvy decisions about what to do with the cash.
The experts may have been caught off-guard when the Reserve Bank opened fire on interest rates earlier this month, but the fact of the matter is the Kiwi economy needs a bomb under it.
That’s the view of Kiwibank Chief Economist Jarrod Kerr following the central bank’s surprise decision to drop the Official Cash Rate from 1.5% to a record low 1%. The move is Governor Adrian Orr’s response to an economic outlook that has lost its shine. Whereas a year ago New Zealand was basking in a rosy annual growth rate of 3%, now we’re staring down the barrel of the 2’s.
What’s a percentage point between friends, you may ask? Quite a lot, because don’t forget growth is cumulative, Kerr says. “If you’ve grown 2% last year, compared to 3%, your base is just that little bit lower. Over time the trajectories really do widen.
“That lower growth is going to lead to lower inflation, lower wages, and a lift in unemployment. So that’s what we’re facing at the moment, our growth is that much lower than it should be.”
The Reserve Bank is aiming to stimulate the economy by making it easier to borrow money – not recklessly, but where it matters, such as in taking on debt to expand businesses and build badly needed infrastructure. Enabling small and medium-sized businesses to have a crack is key to all of this, Kerr says.
“We desperately need the entrepreneurs, the creators of this country to continue and to build. Making it easier to do business, to set up, take on a bit of debt if they need to get going, that’s critical. Because it’s those small businesses that we’ve got a lot of, they’re the ones that can really reshape this economy.”
Lower interest rates afford business owners more choices. For one, it means they can pay off debt faster. It also gives them headroom to expand by investing in new plant or technology and taking on more staff.
Sysware Group founder Charles Chinnaiyah didn’t even wait for the anticipated interest rate cut to be officially announced before leaping into action. The Wellington-based business intelligence and analytics provider is currently immersed in a research and development project using artificial intelligence for criminal profiling. The technology is moving so fast that unless it’s constantly spending money on R&D it is playing catch-up, and because Sysware had already begun the AI project it didn’t qualify for any government grants.
“The low interest rates is giving us an opportunity to employ a few more people to do more research work,” he says.
“We started looking for staff ever since we heard about the interest rates going down, so it was actually a calculated risk.” The firm of 12 is likely to hire at least two more skilled people, Chinnaiyah says.
Thomas Naylor is co-founder of Outside Accounting, an accountancy firm that specialises in advising small businesses, so he’s looking at the implications of the lower interest rate environment from the perspective of both a business owner and how it can help his clients.
“It’s an opportunity for us. We could be, say, taking over another accounting businesses, we could probably afford to do that now with interest rates dropping.
“It looks like the economy needs that sort of stimulus, they’re wanting people to invest in the likes of business rather than property, for example.”
With rates likely to stay low for some time to come it’s obviously a good time to consider growing your business, Naylor says. But being an accountant he also takes the more conservative view, and is advising his clients to be savvy.
“If they are dropping the rates there’s obviously a problem in the economy. So is that going to mean more businesses are going to start to fail?
“I think there’s a real importance now on businesses operating to an optimal level. So they really do need to think about what is their business, what are they trying to achieve, making sure they’ve got that right structure in place, being aware of their numbers, knowing what their risks are.
“If you’re in the right business, you’ve got a solid business, I think yes, it’s a great time to expand. But maybe if you don’t have a huge amount of working capital, you’re not all over your business, I’d say it’s a bit of a risk to take that plunge.”
Borrowing more just because rates are low is also a danger, Naylor says. “I think it’s always good to pay down debt as soon as you can, unless you’ve got a better use for that money like expanding your business.”
“Cautious optimism” is how Kiwibank business manager Teaho Pihama is describing the mood among his clients following the latest rate cuts.
The lower borrowing costs are encouraging, but business owners are mindful that it’s only one factor and they’re wanting to make decisions that cover them for a number of scenarios, he says.
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“For example, a digger driver was talking about whether he buys a specific piece of kit that does one thing, or whether he spends a bit more and buys something that does three or four different things.
“They’re making the investment in a way that’s meaningful if there is any dramatic change in the Kiwi economy,” he says.
The main thing is to use this time to either invest in your business or other wealth opportunities, or to pay down debt. This will help ensure financial stability when rates inevitably rise again, Pihama says.
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