The Fed is expected to continue raising interest rates in 2022 to combat inflation. For small business owners, the prospect of rising interest rates may seem daunting, but the reality so far may be less worrisome.
Small business exposure to rising interest rates may be direct (if you have variable-rate loans, for example) or indirect (if your business is affected by consumers changing buying patterns in response to rising interest rates). First, let’s review the specific risks, and then we’ll provide some tips to help you prepare for continued rate hikes.
Understand the risks
Immediate Risk – Variable Rate Debt: Business owners with variable interest rates on loans or credits will be most affected by any rate increase. Floating rates, also known as floating or adjustable rates, fluctuate over time based on economic conditions. An interest rate hike may increase your interest payments on any loan, line of credit (LOC), or variable-rate credit card, increasing the total amount you owe on these debts.
Indirect risk – changing consumer spending: In addition, higher interest rates often mean consumers spend less, choosing to save for a higher rate of return. Such behavior generally reduces demand for goods and services. Some businesses will benefit from these value-driven trends; others will need to take steps to support their businesses.
Assess your risks: Now is the time to identify the risks, if any, that are most relevant to your business. Start by looking at the terms of your business loan, LOC and business credit card to determine if your interest rate is fixed or contact your lender and/or banker.
Prepare for rising interest rates
Settle outstanding debt at variable interest rates: Higher interest rates mean it will take longer to pay off debt. To be prepared, repay as much of the loan or LOC as possible. If you can’t pay all your debts, try renegotiating the terms to lock in today’s lower rates. Also, consider transferring your business and personal credit card balances to a credit card or loan with a lower interest rate.
Shift your cash management strategy: If you have excess cash on hand, consider moving it to CDs, money market accounts, savings accounts, or other low-risk vehicles that benefit from rising interest rates. As interest rates rise, these instruments will accrue more interest.
Evaluate your financing growth plans: Higher interest rates make borrowing more expensive. As a result, it may be more difficult to obtain financing to expand or cover unexpected expenses. Consider pursuing a fixed-rate loan, such as one backed by the U.S. Small Business Administration (SBA) or another lender, which will protect you from future interest rate increases.
Plan ahead for changes in consumer spending: If your industry is likely to be impacted by cuts in consumer spending, consider ramping up your marketing efforts, such as targeting your most loyal customers and offering special promotions to drive traffic.
If you’re navigating an ever-changing interest rate environment, carefully managing your cash flow is more important than usual. Once you take these steps to prepare for higher rates, keep in mind the potential silver lining. Interest rates are rising to slow inflation and stabilize the economy – both of which could be good for your business in the long run. While higher interest rates mean it’s more expensive to borrow money, you’ll also get higher payouts on interest-earning assets.
Dale Austin is a Senior Manager of Regional Banking at Wells Fargo Boise Metro.