What If Interest Rates Stay Higher for Longer Than Your Business Plan Assumes?
A business plan should still work if cheaper money takes longer to arrive than everyone hopes.
Written by: Melissa Cunliffe (CA)
Business owners have spent several years hearing the same question: when will interest rates come down? It is understandable. Debt is expensive, repayments are consuming more cash and every quarter-point matters on a large facility.
But there is a more useful question for a family business:
What if rates stay higher for longer than our plan assumes?
In September 2026, the RBA said inflation remained elevated and that higher fuel costs, capacity pressures and global conditions could keep inflation persistent. The RBA also noted that the full effect of earlier rate increases was still working through the economy. None of that tells us exactly what the next rate decision will be. It does tell us that building a plan around a quick return to cheap money is risky.
The first stress test: your actual annual cash cost
A rate movement is easy to underestimate when it is expressed as 0.25%. On $1 million of variable debt, another 0.25 percentage points is approximately $2,500 a year before compounding and facility-specific effects. On $5 million, it is approximately $12,500. A full 1% is $50,000 a year on $5 million of debt.
The number becomes meaningful when it is translated into jobs, gross profit or owner drawings. How many extra sales does the business need to generate to fund another $50,000 of interest?
Stress-test Different Interest Rates
For major decisions, model at least three scenarios: the rate being offered today, +0.50%, and +1.00%. The objective is not to predict the RBA. It is to discover where the business stops being comfortable.
Loan repayments and interest cover
Free cash after tax and owner drawings
Ability to fund maintenance capital expenditure
Working-capital headroom
Covenant or lender reporting pressure
What happens at refinance rather than only during the first year
Stress-test revenue at the same time
Higher rates can affect the business twice. First, its own debt costs more. Second, customers may spend less because their mortgages, finance and living costs are higher.
A builder, retailer, hospitality venue or discretionary service business should not model a rate rise in isolation. Combine it with a 5% or 10% revenue reduction and see whether cash remains positive.
Do not confuse EBITDA with cash available for debt
A business can report healthy EBITDA and still feel enormous financing pressure. Debt principal, tax, equipment purchases, working capital, dividends and drawings all compete for the same cash.
Before refinancing, calculate what remains after those commitments. That is the pool from which higher repayments must actually be funded.
The family mortgage matters too
In a family business, business and household cash flow are not completely separate. If the owners' home loan rises significantly, drawings may increase. The company may then be asked to fund both higher business interest and higher household living costs.
That is why the People conversation comes before the loan calculation. What does the family need the business to provide?
What if rates fall?
Great. The business receives upside. A decision that still works at a higher stress-tested rate should become stronger if finance becomes cheaper.
The problem is the opposite: making a long-term commitment that only works in the most optimistic rate scenario.
The 4P's lens
People - Understand the family cash requirement as well as the business debt requirement.
Preserve - Protect cash flow by modelling debt before committing to expansion or equipment.
Protect - Build buffers and refinance early rather than waiting until a maturity date creates urgency.
Prosper - Use debt where it funds assets or opportunities that can still earn an acceptable return under realistic scenarios.
The better question
Would we still make this decision if finance stayed expensive for three more years?
That question will not tell you where interest rates are heading. It will tell you whether your business is relying on something it cannot control. And that is far more useful.
Could your business still handle its plans if interest rates stayed higher for longer?
Stress testing your debt and cash flow can help you make decisions based on what your business can afford, not what you hope rates will do.
Talk to Future Accounting about building a more resilient financial plan.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
