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While the Reserve Bank of Australia’s (RBA) rate rise was broadly expected, this week’s Finance Specialist podcast looked at how higher borrowing costs are filtering through to small and medium-sized enterprise (SME) balance sheets and what that means for the brokers who work with them.
Based on analysis released by Business NSW, the RBA decision to raise the cash rate to 3.85 per cent is expected to deliver a $1 billion blow to small businesses over the next five years.
“The hit of higher interest rates on businesses is obvious,” said broker coach and Finance Specialist co-host Trent Carter.
“It doesn’t matter what funding mix is; there’s going to be a level of pressure that’s put upward on interest costs, and obviously, you need to find cash to pay them.”
SMEs remain cautiously optimistic
Carter said the result of increased costs won’t be panic, but instead a shift to defensive and strategic spending.
“Business will probably be deferring non-essential spending,” said Carter.
“So perhaps who’s going to be most impacted are the people who supply those discretionary-type products, the marketing, the additional equipment, the nice-to-haves in business, rather than the must-haves.”
Businesses with higher levels of variable debt will feel repayment increases more acutely. Others with stronger balance sheets or longer-term structures may absorb the change more comfortably.
Industry exposure also plays a role. Carter highlighted sectors such as healthcare, aged care, and certain areas of mining services as examples of industries with structural demand that tends to persist, regardless of rate hikes. In contrast, businesses tied more closely to discretionary spending may experience a faster slowdown if consumer sentiment softens.
For brokers, however, Carter said this doesn’t mean that there won’t be an appetite for borrowing. Instead, the type and nature of borrowing may change.
He said: “I think what we’re seeing is that the borrowing is a little bit more defensive and strategic rather than necessarily funding growth.
“What I mean by that is they’re going to be funding stock purchases because of the delays that are coming or the higher cost of getting stock into the business. They’re going to be funding their tax bills, they’re going to be refinancing to stretch things out over longer terms to reduce the cash flow impact.
“They’re going to do things that are a bit more defensive and strategic in their business to free up capital and give them the ability to continue trading rather than saying, here’s an opportunity, I’m going to invest capital and get a return on investment on it.”
Carter noted that a “cautious optimism” remained.
“They’re cautiously confident about proceeding with their business and doing things a little bit more strategically,” he said.
Broker Daily recently reported on data from CreditorWatch showing businesses are delaying major decisions, but investment and growth remain on the agenda for 2026.
The role of non-banks in the mix
Carter and co-host Liam Garman also looked at the growing role of non-bank and fintech lenders in SME funding strategies.
Rather than competing directly with the major banks, Carter described a “co-opetition” model, where traditional lenders and fintechs serve different purposes within a client’s funding life cycle.
Non-banks are often used for speed, flexibility and short-term solutions, such as addressing tax debts, seizing time-sensitive opportunities, or smoothing working capital gaps.
Carter said: “I think brokers who are genuinely focused on SMEs and providing solutions, they (non-banks) become a really crucial problem-solving tool in their toolkit.
“You don’t have to deal with fintechs or banks to exclusion, and neither shall meet. They have their place in every SME business owner’s life cycle, and if you understand how they work and what they’re funding in that person’s business, they’re a really critical tool.
“Not that long ago in the finance landscape’s history. The deal was just simply a no from the bank, and the business owner had to figure it out elsewhere. Now they’ve got a solution that’s quick, nimble, and provides a solution.”
Carter and Garman also noted that because non-banks typically operate on risk-based pricing models, small movements in the official cash rate do not necessarily translate into equivalent changes in their rates.
Being the trusted adviser in volatile conditions
Both hosts agreed that the broker’s role as a stabilising force and source of knowledge was crucial in volatile times. That role starts with becoming an expert in the field.
“I think the first thing that you need to do is learn the industry and do some research and understand what drives those types of businesses in your particular area that you’re focusing on,” said Carter.
“Who are the players in that industry, small or big?”
Rather than amplifying market anxiety, Carter encouraged brokers to provide measured guidance, reviewing structures, stress-testing scenarios and helping clients separate short-term noise from structural challenges.
“Be the stable point, don’t be sensationalist with your clients. Be that point that they can call and you’re the calming influence into their business. Not everything’s going wrong in the economy, and there is opportunity for businesses to strategically grow and survive a downturn or an increasing rate cycle,” Carter said.
“At the end of the day, if you’ve got problems with a 25 basis point interest rate rise, I think there are more fundamental issues in that business. So if you do have people that are calling you up, there might be a need for a more thorough cash flow analysis of their business.
“As a broker, at the end of the day, if anyone is very challenged over it, then there might be deeper issues.”
[Related: Brokers see more demand for business and commercial loans]