How businesses can navigate a high interest rate environment
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The interest rate environment is in a state of transition and has been for a few years. While the aggressive rate-hiking cycle is behind us, the Federal Reserve’s future actions will significantly impact borrowing costs.
Meanwhile, businesses are facing challenges like reduced labor pools, changing consumer spending trends, increased operational costs, and tightened credit markets from some traditional sources of debt. To survive and thrive in this unforgiving economic climate, businesses must adopt innovative strategies, prioritize financial discipline, and embrace a long-term perspective.
What can a business do to combat a high-interest rate environment?
- Accumulate as much liquidity as possible. In this environment, it is often beneficial to use your own cash flow instead of maximizing borrowing. Now is the time to focus on cash flow management, find a balance between using credit resources and your own cash flows, and relentlessly discover ways to reduce operating costs and generate more profitability.
- Explore financing options. When additional funding sources are needed, research your options. Financial institutions can provide traditional financing for real estate, equipment, and working capital needs. Generally, real estate and equipment are financed via fixed interest rate term loans with set monthly payments. Working capital loans are typically lines of credit with a variable interest rate. You can also investigate government programs, like SBA 7(a) or SBA 504, USDA grants, or alternative financing from non-financial institutions.
- Refinance debt at lower rates. If your business has existing loans with high interest rates, you may want to explore refinancing at lower rates that could reduce your monthly payments and free up cash flow for other business needs. Strong relationships with your lenders and ongoing communication can be key to understanding your credit options.
Does your business need a capital injection?
A capital injection can be a lifeline for a growing business, but it’s essential to know when it’s truly necessary. Have you explored alternative financing, and understand that you will likely be bringing on a business partner? Key indicators may include financial strain, like cash flow problems, rising debt with no ability to generate excess cash flow to reduce it or the inability to pay suppliers on time or at all; growth opportunities, like market expansion, product development, or acquisitions; and operational challenges, like outdated equipment, talent acquisition, or inventory management.
Careful financial planning and analysis are essential to determine the optimal timing and amount of capital needed, as well as exploring all liquidity and credit options. Having relationships in place with trusted advisors, like a lender and certified public accountant, can help your business navigate these decisions.
How does a business bring in outside capital?
The optimal method for a business depends on several factors, including stage of business development, industry, risk tolerance, desired level of control, and long-term goals.
Many businesses look to friends or family for capital resources, but that can strain relationships. Other avenues for securing external funding include debt financing, like loans or bonds, or equity financing, like private equity, venture capitalists, or angel investors. Whatever path you take, seek trusted advice and explore all options understanding both the upside and downside of your decision.
Where are interest rates headed?
Interest rates for businesses have been on a roller coaster ride in recent years. After a prolonged period of historically low rates that fueled economic growth, central banks around the world embarked on aggressive tightening cycles to combat surging inflation. This led to a sharp increase in borrowing costs for businesses, making capital expenditures, ongoing working capital, and expansion plans more challenging.
However, hope is on the horizon as the Fed has indicated we may see a reduction in interest rates as soon as September, due to leading indicators within the economy signaling such a reduction. These potential interest rate cuts offer a reprieve for businesses looking to access more affordable financing.
Navigating the challenges of a high-interest rate environment is not easy. But periods of economic turbulence also present opportunities for businesses with the foresight and resilience to adapt.