On 3 February 2026, the Reserve Bank of Australia announced an increase in the cash target rate. This announcement takes the cash rate from 3.6% up to 3.85%.

With inflation on the rise, greater capacity pressure and the labour market position looking tight, the RBA felt that action was needed to nip these economic trends in the bud. 

This rise in interest rates can be both positive and negative for your small business, so it’s worth understanding the effect that interest rate changes can have.

How an increase in interest rates may affect your business finances:

Increased cost of borrowing

Higher interest rates on loans: An increase in the cash rate translates into higher monthly interest payments on your existing variable-rate business loans. It also means less favourable terms on any new lines of credit or equipment financing.

Tighter access to credit: As borrowing costs rise, lenders often tighten their criteria. You may find it more difficult to secure financing for expansion as banks become more cautious about your ability to service debt at higher rates.

Strained cashflow

Increased debt servicing: Higher interest payments eat into your monthly margins. This reduces the amount of free cashflow you have available to reinvest in marketing, maintenance or staff bonuses, etc.

Decreased consumer spending: As the RBA raises rates to combat inflation, households often cut down on their spending to cover their own rising mortgage payments. This can lead to a cooling of demand for your goods and services.

Shift in investment strategy

Higher cost of capital: With more expensive borrowing, the overall costs of new projects may increase. Justifying the expense of these projects becomes harder, so you may need to delay R&D investment or pause upgrades to tech and machinery.

Reduced investor appetite: Higher interest rates can make high-risk business investments less attractive than lower-risk assets, like government bonds. This makes it more challenging to raise capital through equity financing or find new private investors.

Economic cooling

Slowing the economy: The aim of the cash target increase is to dampen economic activity to control inflation. For a small business, this creates a more challenging environment characterised by cautious consumer behavior and higher operating costs.

Focus on efficiency: In a high-rate environment, the focus shifts from ‘growth at all costs’ to ‘resilience and efficiency’. In a tighter economy, being disciplined with your financial management is a vital way to weather the storm. 

Economic times are challenging at present, so a jump in interest rates was probably not the news that many Aussie small businesses were hoping for to kick off 2026.

If you’re worried about managing loan payments or accessing the funding you need to action your 2026 plans, come and talk to our team.