Update: How Rising Rates Impact Your SMB
The current high interest rate environment is taking a toll on both consumers and small businesses alike. In March of 2020,?borrowing rates?in Canada were lowered to nearly zero and despite Covid restrictions, low-cost money starting flowing into SMBs. Fast forward two years later, inflation reached a?39-year high of 8.1%?in June of 2022. To tame inflation, the Bank of Canada announced a series of?incremental rate hikes.?Coupled with rampant inflation and?labor shortages,?these are un-welcomed challenges for small business owners across Canada. In this blog, we update you on the latest numbers and offer you guidance on how rising rates are likely to impact your small business.
Let’s get you up to Speed
In?March of 2020, Canada’s key interest rate was?lowered to 0.25%?and remained the same for two years. During this time, Canadians borrowed money for practically nothing, which increased spending across various industries (i.e., online shopping, construction, health care, etc.). In early 2022, the Central Bank started hinting of changes to its monetary policy, making higher rates both a reality and inevitable. As expected, the Bank of Canada stayed true to its word and began raising interest rates as outlined in the graph below.
Will Interest Rates Climb Further in 2022 & 2023?
We are now sitting at 3.25%, which is the highest policy interest rate we’ve seen since 2008. It usually takes up to two years for the impact of higher rates to be felt in the economy, which could indicate higher rates to stick around through 2023. Persisting rate hike cycles comes at a cost, they reduce spending power and could tip the Canadian economy into a?deep recession.?There is big debate whether the Bank of Canada should continue to hike interest rates or to take a more cautious approach. That said, the Central Bank has made it crystal clear that it’s committed to raising rates until inflation is back?below 3%.
Impacts of Rising Rates on Your Small Business
Rising rates impact Canadian consumers and businesses on things like mortgages, lines of credit, savings accounts, etc. With no signs of interest rates being lowered soon, how will your small business be affected by these incremental rate hikes?
1. It Could Become Difficult to Plan
Raising rates affect the prices of goods, services, and a lot more. As a result, dealing with fluctuating prices makes planning out your profits and expenses much more complicated. That’s why evaluating the current state of your?business’s financial health?is key to dealing with new economic scenarios and stresses. This can be achieved by asking yourself the following questions:
To Know thyself is the beginning of wisdom – Socrates
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It’s important to run through these questions in addition to ‘’what if’’ scenarios to see if your business can remain?solvent.?What if rates go beyond what they are now? Would you still be able to cover your credit or loan obligations? Pressure check your business now to ensure you can withstand a more expensive and potentially slower economic period in the future. As for planning, stay open-minded during the short term, so you can adjust as changes arise.
2. Obtaining a Loan Could be Expensive
As rates continue to increase, the cost of borrowing will drive up over time. Understandably, this could deter your small business from getting a business loan. But in most cases, financing is needed to survive or to pounce on new opportunities. When it comes to small business loans, you have a?variety of options?to choose from, both short-term and long-term. If you need financing now, consider locking in a fixed rate before the next rate hike strikes. Plus, you may be able to access lower rates if you’re in good financial health. If you already have a loan, and it’s an adjustable rate, consider shifting to a fixed-rate product to no longer be affected by rate hikes in the future.
3. Your Financing Options Could be Limited
While banks may be a great financing option for some, it may not be for others. With rising rates, banks become more selective, making it harder for small businesses to qualify for a loan. Alternative lending can be a better solution for some small businesses and may offer you additional flexibility and higher approval rates. If you’re looking to weigh in your options,?OnDeck Canada?can offer you a wide variety of lending options with both flexible or fixed repayment options such as?Term Loans?and?Flex Funds.?Find out how much your small business qualifies for with our?streamlined?application process.
4. Your Cash Flow Could be Affected
As small business owners continue to grapple with?rising costs?due to growing inflation, your cash flow could be severely impacted. You may find yourself working with less cash as debt payments increase and demand slows for products and services. Sure, it’s only temporary. But in the short-term, you could find yourself in a precarious situation. To remain cash flow positive, you might have to make some difficult decisions, like operating with a leaner team. Although laying off staff, cutting down on wages or hours is never easy, it can be a viable solution when dealing with an expensive economy.
If being leaner is not an option, cut out any expenses that are non-essential to your business’s success. Look at your subscriptions or anything that you pay on a contractual basis, such as unnecessary services or features. In addition, determine if there are any projects or areas of your business that can wait and be revisited in the future. You should be thinking 2 or 3 years ahead, once issues stemming from rates and inflation have cooled.
A Welcome Change
Rising rates may be initially challenging to deal with for some small business owners. But, down the line, it will likely bring welcomed changes to the Canadian economy. By the end of 2023, inflation will hopefully settle and reach its?2% target, resulting in reduced costs for consumers and businesses. As economic conditions begin improving, and borrowing gets less expensive, you will be able to focus on building a successful business for the future.