8 Considerations for Businesses Impacted by Higher Interest Rates

Higher interest rates means higher cost of doing business for any organization that holds any type of debt finance and our?interest rate calculation ?scenario outlined how servicing a business’ debt could easily escalate. For businesses operating on very thin margins, this increased expense could prove the difference between profit and loss and business owners should act early to mitigate against interest rate risk for the remainder of the year.

8 Considerations for Businesses Dealing with Higher Interest Rates

1. Act Now to Secure Finance

If you think you’re?going to require finance in the short-to-mid-term (the next few years), act now and get it in place before rates climb further. This is particularly important if the business' credit rating is on the average-to-poor side as accessing traditional loans will become more difficult as lenders impose more stringent terms.?

2. Convert Existing Variable-Rate Financing to Fixed Rate?

Financing a business through variable-rate loans has been a good strategy whilst interest rates have been historically low, but as rates rise, lenders move quickly to protect their own profitability and that additional interest will start to eat into your cash flow.

A few percentage points increase could mean thousands more in additional expense on the balance sheet at the end of the year, which could certainly be put to better use elsewhere. Consider financing away from variable-rate lines of credit, loans and such like, which will save the business money and conserve valuable cash flow.?

3. Eliminate or Convert High Interest Debt

Consumers pay-down high-interest debt as rates go up and businesses should seek to do the same. Credit cards and?merchant cash advances ?are typically very high interest financial products and should be used with caution, particularly in the face of increasing rates.

An MCA contract is based upon your expected card revenue which is a major concern should consumers reign in their spending as a result of the contracting economy; this would signal a sales downturn is imminent and may render a borrower unable to pay back the MCA under the terms of their agreement. ?

4. Look at Alternative Sources of Finance

Debt financing through traditional loans isn’t the only option available for finance. Quite often, alternative finance options such as invoice factoring, don’t add any debt to the company balance sheet. Asset based loans, secured on the business’ collateral provides another option for businesses that want to steer clear of higher-interest finance but don’t have sufficient trading history to qualify for bank loans or they’ve exhausted their bank credit due to rapid growth and the bank has become more cautious about extending further.?

Although rates will also creep up with non-traditional lenders, they often provide a more flexible, collaborative approach to financing that fits a short-term need. The good news is that there are a multitude of options out there for business owners, you just need to find out what’s available to you and act on the information early.

5. Reassess Capital Structure

Most businesses will be financed by a combination of debt and equity but as interest rates rise, it could be a pertinent time to reassess your capital structure. Increasing your equity ratio by selling part of the business may be an option to raise cash but diluting your company ownership should not be undertaken lightly and not without consulting professional advisors.

The?Corporate Finance Institute offers a view on optimal capital structure ?but what’s right for one business may not be right for another, optimal capital structure is dependent on many variables.?

6. Assess the Impact on Currency and Exports

If exporting is a big part of your business, it’s wise to audit your position in regards to rising rates. Generally, currency gains value (becomes stronger) as interest rates rise, making it less appealing for overseas businesses to buy your products or services but speak to the bank about how you might protect yourself from currency fluctuations. Forward contracts may be one way to mitigate the impact of higher rates on your foreign currency transactions but won't be available to everyone.

7. What Other Expenses are Impacted By Interest Rate Rises?

Servicing debt becomes more expensive as interest rates go up, but there are other expenses that also need to be considered – the cost of repaying your commercial property mortgage, leases, vehicle and equipment rentals will also likely move north with rates. Audit all of your commitments and negotiate fixed-rate contracts where possible.?

8. Finally - Consult with Professionals

Many businesses have never experienced a period of consecutive interest rate hikes and may be caught off-guard by the impact on liabilities and cash flow. If you’ve never taken the time to consult a finance professional, whether that’s your finance provider, planner or accountant, it’s advisable to do so before the additional debt expenses start to impact your ability to cover your regular payables or make payroll.?

Someone who has experienced the ebbs and troughs of interest rates throughout a businesses’ life cycle will be best placed to advise on what might be done to mitigate risk and how best to manage additional interest payments whilst at the same time not inhibiting plans for growth and expansion.?

Assess Where the Business is At Now

To successfully navigate the rest of the year and enter into a challenging 2023 from a strong point, business owners need to be proactive in determining their position, identifying the risks around interest rate rises and consulting professional help to put an action plan in place for their specific needs.

Sallyport works with many businesses who require tailored, flexible financing to meet their working capital needs in the short-term.?Reach out ?to our team for comprehensive advice on your options today.?