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Opinion: How to adjust to rising interest rates

Industry Insight

Posted online

Interest rates are an everyday part of business.

Companies pay interest on money they borrow, and when they take the opportunity to invest any extra cash, they receive interest on that investment. Companies also provide a credit option for their customers. If customers purchase goods or services using that credit, the company charges interest.

When interest rates rise or fall, it affects these business activities as well as the buying habits of the company’s customers.

In March, the Federal Reserve increased interest rates by 25 basis points, to a range of 1.5 percent to 1.75 percent. It was the sixth increase since December 2015, when the Fed started tightening monetary policy for the first time after the financial crisis of 2008. Many financial advisers believe interest rates could increase at least three more times by year’s end. This can be good news as it means economic conditions are strong, but it also brings some long-term uncertainty for small businesses.

When interest rates rise, borrowing becomes more costly and often forces businesses to rethink their financing options. Here are some ways to prepare.

Review the business plan
Since rising interest rates can affect the amount of money coming in and out of a business, it’s critical to take a second look at your business plan. Make sure it accounts for possible further rate increases and leaves enough room for important capital required for innovation and reinvestment activities to sustain growth and profitability.

In order to stay on track, many small-business owners may want to reconsider how their operations are funded. This may entail cutting down on some costs and tightening up on spending. The level of cutting down depends on how much the business relies on borrowing.

When borrowing money, consider applying for fixed rates. Although it may be more expensive in the short-term, if rates continue to increase, long-term savings could surpass short-term gains. Companies that have loans with fluctuating interest rates could lead to reduced profitability, which in turn can make it harder to secure additional funding.

Determine cash flow needs
Perhaps the biggest challenge of any company is managing cash flow. After all, it is the lifeblood of any business. Having a game plan in place to make sure all of your debts are paid while ensuring your business is operationally sound is important.

Small businesses tend to operate with limited cash flow, so when interest rates rise, the additional cash needed to repay loans can be scarce. In addition, short-term loans to cover cash-flow gaps may be difficult to qualify for or too pricey to afford.

Therefore, when applying for a line of credit to complement cash flow, it’s better to be proactive rather than reactive. Strategizing with your lender in advance will provide the owner an optimal amount of time to consider the best option and make a sound decision.
 
It is essential that business costs are monitored closely and that relationships with vendors remain strong through open communication and a clear understanding of terms.
This will ensure cash flow remains steady and operations run smoothly.

Get advice on business goals
In light of interest rate changes, it’s increasingly important to speak to your lender and keep them updated on your current position and plans for the future. Having open and honest conversations with them can help identify problems early and will ultimately benefit your business.

This can provide valuable information to help determine whether the best plan of action is to pay down debt or postpone borrowing plans to help get back on the right track to profitability.

Overall, rising interest rates could have significant long-term consequences for smaller businesses. Financial analysis is essential to running and growing a small business.

It’s crucial that business owners respond now by reviewing their business plans and funding strategies, in order to limit the impact increasing interest rates could have on their business.

Peter Ostapko is a commercial banker for Arvest Bank in Springfield. He can be reached at postapko@arvest.com.

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