Many Australian small business owners are taking a double hit each time interest rates rise because they often have both a mortgage and a business loan secured by their home.
And the pain is being made even more intense by the fact that banks have pushed rates higher for business loans than home loans.
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Recent RBA figures show that on loans and overdrafts SME owners faced average actual interest rates of 9.31% in January 2008, well above the official cash interest rate of 6.75% and the 7.64% average rate payed by larger businesses.
Despite the RBA lifting rates by 0.25% between October 2007 and January 2008, the average rate paid by small business owners increased by 0.5%.
And almost half of small business borrowers feel the squeeze from both sides when interest rates rise. Data collected by research house Cannex shows that just over 45% of business loans are residentially secured, with the majority of those – 30.19% – on variable business loans.
This interest rate double-whammy gives business an additional reason to be cautious in choosing the finance product that is best for them, Cannex financial analyst Jeremy Ooi says.
“Even if you think rates might go down, if you have two mortgages you should be cautious,” Ooi says. “Even if you don’t want to fix both loans it could be wise to go one fixed and one variable.”
The gap between business and home loan rates, even where they are secured against the same property, reflects a view among banks that business owners’ incomes are higher risk than an employee’s income.
“Banks perceive that if you are an employee your income is more constant and reliable, and the risk you won’t be able to repay is lower.
“Income from small business is seen as more volatile and irregular – although that depends on a whole range of factors such as your record and the industry you are in. So if you are small business owner there is a greater risk, and that attracts a premium,” Ooi says.