Categories: Finance

A Few Thoughts on Your Business and Rising Interest Rates

For more than a decade, business owners like you and me have enjoyed running our companies in a low-inflation, low-interest environment. But that’s changed.

Like our parents and grandparents in the ’70s and early ’80s, we’re now experiencing higher inflation rates. As a result, thanks to the Federal Reserve’s past and planned actions, we’re also seeing rising interest costs.

I don’t believe current rates will reach what we saw in decades past, but they’re still rising. And they will be with us for a while—at least a year.

Knowing this, what do we do? How do we operate our businesses in these times of higher interest rates? Like all other business problems, there’s never one answer. There are a myriad of strategies that smart business owners have used for years.

Strategies to manage rising costs

The first thing I want to stress is not to freak out. Interest is a cost like all other costs. Even when our parents and grandparents faced rates as high as 18%, the world did not end. Most business owners at the time navigated their way through it. They incorporated these added costs into their overhead and factored it into their product pricing. You and I will do the same.

But you may be concerned that raising your prices to absorb these higher costs of capital could cost you customers. There’s one simple way to avoid that problem: Carry less debt.

Debt is no longer as cheap as it was in the past. If you can use your excess cash over the next year to pay down your debt, then you won’t have to worry about how to pass on the costs of increased interest to your customers.

If you have credit card debt, pay that down first, because it comes with the highest interest rates. The same goes for any online loans or merchant advances. Maybe you can’t pay it all down, and that’s fair. Try to start minimizing it to the extent you can. Consider a personal loan or a second mortgage. As long as you can manage the debt maintenance, you’ll find that the interest rates on these types of loans will be significantly less than the rates you’ll pay elsewhere.

Some of my clients are in conversations with their bankers to renegotiate their loans. You should do this, too. If you have a variable interest loan and you know rates are likely to continue to rise, then it could make sense to refinance into a fixed loan. You may pay a little more, but you’ll at least reduce the uncertainty of your monthly payments and be better able to budget the future. If you have a working capital loan, work to keep it at a minimal amount or consider refinancing it.

In these times of higher costs of capital, you may also need to reconsider capital investments that will require debt. Revisit your return on investment on any considered purchases, including any tax benefits for buying property and equipment. Compare these benefits against higher interest costs to see if it makes sense over the longer term.

Take a close look at the Section 7(a) and 504 loan programs offered by the Small Business Administration. With these government-backed loans, you can borrow up to $5 million at competitive market rates with fixed and variable options. As banks become leerier of lending to small businesses as the economy slows, these loans could help provide capital for your business.

Silver linings for small business owners

There is some good news about rising interest rates: Rising interest income.

For years, we’ve ignored interest-bearing accounts. Back when interest rates hovered near or below 0%, it was about as profitable to keep cash under the mattress. But those times are changing. Rates on money market accounts and certificate of deposits are beginning to creep up, as are rates for Treasury securities.

If you leave your money in a non-interest bearing account, you’re missing out. And with costs increasing thanks to inflation, even a few dollars earned in interest could help soften the impact elsewhere. So dust off those interest-bearing accounts and set up automatic sweeps to immediately invest any unused funds sitting in your checking account. Consider putting funds into both short- and long-term interest-bearing securities.

The strategies I’ve described above are simple. Refinancing debt in 2022 is a much easier experience than it was in 1982. There are also more interest-bearing securities available for small businesses today than you could ever find in the ’80s. By acting now, you and your business could benefit from the current market conditions.

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