Interest rates have been at near historic lows for the past few years. It’s spurred people to buy new homes and even some to start their own business. With the current inflationary environment, interest rates have risen slightly and are expected increase over time. Federal Chairman Jerome Powell has signaled that the Central Bank intends to raise interest rates throughout the year. While the Federal Reserve doesn’t directly control the rates that businesses may pay on a loan, banks and other financial institutions tend to follow the Fed’s lead.
Here are a few things to consider so your business doesn’t get caught off-guard.
Increased cost of lending
Interest rates can affect businesses’ ability to borrow. Businesses, especially small businesses, rely on loans, credit cards and lines of credit to help fund their growth. If your business is looking to purchase new equipment, real estate, or upgrade your IT, you’ll likely find higher interest rates for the loan. If your business has any variable rate loans, or loans that have interest rates that change as the market does, you’ll likely see your monthly interest payments rise.
Rising interest rates can be lucrative for banks, leading to more competition. You may be able to negotiate a lower rate as banks compete for your business. As interest rates rise, it’s a good idea to shop around if you’re looking for a loan. Refinancing any variable rate loans into a fixed rate may also be beneficial.
Rising interest rates on your loans can shrink your cashflow. If you’ve been in business awhile and you have some cash on hand, slight interest rate increases can usually be weathered. If you’re a newer business that doesn’t have the historical data to plan for ebbs and flows in consumer demand, you’ll want to be mindful of how many loans you have. You may have to wait to finance any growth until the market levels off.
Cost of goods
Rising interest rates affect more than just loans or credit cards, they have a ripple effect throughout the economy. The cost of goods will likely increase, and your suppliers may have to raise their prices to offset the increased cost of doing business. Again, you may notice that your monthly cashflow is restricted as other costs go up. If you haven’t already, look at your business and see if there are ways you can streamline operations and strategies to save your business some money each month. Remember, every little bit helps.
Consider consumer behavior
Interest rates affect everybody, including your customers. Rising interest rates can make your customers more apprehensive about purchasing. They are more likely to spend less when interest rates are higher. This is not true for all businesses. If your business sells products that typically need financing, such as equipment, real estate or vehicles, customers may pause on purchasing. Professional services, such as legal or marketing services, are also prone to changes in consumer demand as customers may cut back on discretionary spending. Again, take a look at your business model and see if there are ways you can adjust your operation based on the current business environment.
Cash on hand
It can be hard for businesses to build up their cash reserves in our current inflationary environment, but it serves as a reminder that it’s always good to have something set aside in case you experience a downturn. Make a plan to set aside a little bit each month. Once you have a decent amount set aside, talk with your banker about investing and wealth management to maximize your funds.
Talk with your banker
Smart businesses treat their banker as a trusted adviser, like their lawyer or CPA. If rising interest rates restrict your cashflow, talk with your banker about your options. Having a good relationship with your banker will make this conversation easier. Think about the past two years and the pandemic. We have seen shutdowns, operational changes and changing local conditions that have likely affected your business. Being able to talk with your banker about the challenges you are facing, whether internal or external, is much easier when you have a relationship with that person. They can recommend whether refinancing or consolidating some of your loans is a good idea. They can also recommend resources to help you manage money and provide guidance for achieving revenue goals.
It's important to note that rates will not skyrocket overnight. Your business will not feel next-day effects. Given that we expect interest rates to rise over time, this is a great time to look at your business, streamline where you can and prepare for the future. It will help your business make it through small downturns and economic changes and help you take advantage of opportunities when they arise.