The current environment of increased interest rates, challenging capital markets, changes in regulation, and an uncertain economic future, requires businesspeople to be thoughtful and proactive. Given both domestic and international concerns, about inflation, unrest, and regulatory direction, we should ask ourselves:
- What impact do interest rates have on my business?
- How will this affect cash flow?
- What short-term actions should my business consider?
- What longer-term initiatives should be put in place?
Short-Term Impact of Interest Rates on Businesses
- Increased borrowing costs: If your business has debt, rising interest rates will make it more expensive to borrow money. This can impact your cash flow and make it difficult to invest in growth.
- Reduced consumer spending: When interest rates rise, consumers must spend more money on debt payments. This can lead to a decrease in consumer spending, which can hurt your business if you sell consumer goods or services.
- Slower economic growth: Rising interest rates can slow down economic growth. This can make it more difficult to find new customers and grow your business.
Long-Term Impact of Interest Rates on Businesses
- Higher cost of capital: The cost of capital is the rate of return that businesses must generate on their investments to satisfy their stakeholders. When interest rates rise, the cost of capital rises as well. This makes it more difficult for businesses to justify new investments, which can slow long-term growth.
- Increased competition for both equity and debt: When interest rates rise, businesses that need to raise or borrow money must compete with other businesses for a limited supply of capital. This can lead to higher transaction and borrowing costs making it more difficult for businesses to finance their growth.
- Changes in consumer behavior: Rising interest rates can also lead to changes in consumer behavior. For example, consumers may become more price-sensitive and/or less likely to spend money on discretionary items. This can have a long-term impact on businesses that rely on consumer spending.
What Should You Consider Now?
When interest rates are rising, it is important to carefully consider the impact on your business. Here are a few things to think about:
- Your business’s financial health: How much debt does your business have? How much of your revenue goes to debt payments? What is your profit margin? The more debt you have and the lower your operating margin, the more vulnerable your business is to rising interest rates.
- Your industry: How sensitive is your industry to changes in economic growth? If you are in an industry that is sensitive to economic growth, it is likely that rising interest rates could have a significant impact on your business.
- Your customer base: How sensitive are your customers to changes in their disposable income? If your customers are likely to cut back on spending when interest rates rise, then you need to be prepared for a decrease in revenue.
Developing a Plan
You should also develop a plan to mitigate the risks of rising interest rates. Here are a few things you can do:
- Review, and where possible, reduce debt levels or refinance any high-interest debt. The less debt you have, the less you will be affected by rising interest rates.
- Plan for a higher cost of capital. Improve your cash flow. Negotiate with suppliers and vendors to extend payment terms. Reduce inventory levels and review receivables to improve collections. This will give you more flexibility to deal with unexpected changes.
- Review your operating costs. Consider investing in efficiency measures. This will improve margins and make you less sensitive to changes in rates.
- Diversify your revenue stream. Focus on marketing and sales strategies that will make you less reliant on any one customer, product, or industry.
- Develop new products and services that meet the needs of customers in a changing economic environment.
- Start talking to your bank/lender. Do this as far in advance as possible, ideally at least 6 months ahead. You want to gauge their interest and be able to seek other options.
By taking these steps, your business can better position itself to weather the difficulties of rising interest rates, uncertain regulatory environments, and potential domestic and international challenges. You will be in a better position to compete, grow, and succeed in the long term.
Working with the Wolf & Company, P.C. Strategic Services Practice team will aid you and your company in preparing, reacting, navigating, and executing to better results.
