The rate rise that hits small business three times

When the Reserve Bank of Australia (RBA) lifted the cash rate to 4.85 per cent on 3 November, its fifth rise of the year and the highest setting in 18 years, the coverage went where it usually goes, to households with a mortgage. For small businesses the same decision lands three times over, and the Council of Small Business Organisations Australia (COSBOA) has set out how.

The first door is the till. COSBOA chief executive Skye Cappuccio said retail, hospitality and personal services “will see it at the till” first, as households cut back. The composition of the latest spending figures shows where that falls. In September, essential spending rose 1.2 per cent over the month while discretionary spending rose 0.3 per cent, and discretionary is precisely where most small firms earn their living.

The second door is the cost of the firm’s own borrowing. For a business whose revenue is growing no faster than its costs, Cappuccio said, “higher borrowing costs come straight out of already tight margins or the owner’s pay.” The scale of that squeeze is in the COSBOA and Square State of Small Business Report, which found the typical Square seller’s revenue grew 3.9 per cent over the year, just ahead of the 3.8 per cent inflation rate the report measured it against. Standing still, in other words, and 42.9 per cent of owners said they were working longer hours to do it.

The third door does not appear on the business’s books at all. Around half of all small-business credit is secured against residential property, on COSBOA’s reading, a figure broadly consistent with the RBA’s own work on small-business finance. For those owners a single rate rise arrives twice, once in the business loan and once in the mortgage behind it, on the same balance sheet and often in the same week.

What makes the fifth rise different from the first is what has already gone. Four earlier increases this year have used up the slack, and Cappuccio warned there is “little financial buffer left to absorb another increase in costs.” The timing sharpens it. Glenn Fahey, chief economist at the Australian Retail Council, noted that retailers are “heading into their most important trading period with stock ordered, staff and bills to pay,” which is the worst moment to find the buffer gone.

The mortgage-holder and the shopper have had the attention this week, and the small-business owner sits quietly at the intersection of both, absorbing the same rise from three sides at once. COSBOA is an advocacy body and “little buffer left” is its case to make, but the mechanism underneath it is real and does not care who is making the argument. Our expectation is that this shows up first in hours cut and owners’ pay forgone rather than in a wave of closures, and that it will be read, wrongly, as resilience. The next spending headline will probably look sturdy. The figure that actually matters is how long owners can keep paying themselves last.