5 strategies for your business as interest rates rise
Interest rates have finally begun to rise, and our Chief Economist Scott Anderson, like many economists, expects rates to continue to rise gradually in coming months.
Any time you know in advance that a factor affecting your business (such as interest rates) is going to change, it’s a golden opportunity to do a quick assessment. The result may put you in a stronger position to cope with change, rather than having to react after the fact.
With that in mind, here are five ways a small business can prepare for the expected rise in interest rates in 2016:1) Do nothing: I’ll tell you up front that in the near term the rise in interest rates is not going to be a life-changing event. Economists are forecasting that the initial 25-basis-points hike will be followed by modest increases over many months. For now, in dollars and cents, this means that on an outstanding loan balance of $100,000, the monthly payment may rise $22 a month. Skip one business lunch a month and you’ll be fine. 2) Buy fixed assets: If you’ve been on the fence about a large purchase, such as equipment or commercial real estate, be aware that the cost to finance those types of purchases will likely be higher in the future. The expected gradual pace of rate increases suggest there’s no need to panic, but there’s also a likely cost involved in waiting. On an $800,000 fixed-rate loan to purchase your building, for example, each quarter point rise in rates will likely translate into an added $2,000 in interest costs per year. Granted, not a huge increase, but over time the impact of several interest-rate increases will add up. 3) Manage your borrowing costs: What levers do you have to offset higher borrowing costs? Perhaps you can reduce your borrowing needs, or maybe your revenue is rising fast enough to cover your added costs. Will you pass on the added costs to customers, reduce expenses, or pay vendors sooner to get trade discounts? Remember, as I’ve written about before, sometimes it is less expensive to borrow and pay vendors quickly than to extend payment terms. Alternately, you may want to look at ways to improve collections so cash is flowing into your business faster, providing you with more financial flexibility. 4) Invest excess cash: If you have excess cash, ask yourself how you can put it to work most effectively. Look at your borrowing needs and costs, your business’s excess cash balances, and what your alternatives are for putting that cash to work. As rates start to rise, what you do with excess cash becomes more important, whether you use the cash to grow the business, pay down debt, or make short-term or long-term investments. 5) Run a stress test: Any time conditions start to change is a perfect moment to run a quick stress test on your business, or, in other words, a “what if” test. This can also help ensure your business is prepared for a worst-case scenario. Let’s suppose rates were to go up 300 basis points (3%) in the next two years. In that situation, what would the payments on your business line of credit amount to? Planning now for a more extreme interest-rate environment may help you identify gaps in your strategic plan, as well as opportunities to strengthen your business.
I’ll close by encouraging you to talk to your banker. We spend a lot of time thinking about interest rates and what they mean for our clients’ borrowing costs, cash flow, and the financial health of their businesses. A banker who knows your business can provide critical guidance on these issues and help you be better prepared for a changing-rate environment.