Understanding the interest equation from the banking perspective is easy:

Fast-moving inflation = fast-rising interest rates

How better to discourage borrowing and spending but to raise the interest rates on loans and mortgages, and increase commercial interest rates for businesses?

The obvious ‘problem’ is that higher interest rates cause negative outcomes for entrepreneurs:

•   Growth becomes more difficult when debt becomes more expensive.
•   High interest rates could lead to recessionary pressure.

A lot of growth is fueled by debt, such as taking on a loan to buy new machinery or acquire another business. When interest rates are higher, it’s more expensive to service that debt. 

Short of borrowing from friends and family, the lowest business loan interest rates will always be via Government and Bank loans (from A-list banks…the biggest ones).  As you move down the list to B and C banks, credit unions or lenders, the higher the interest rates. Drop us a line if you’d like to know if you qualify for any of the Tier 1 lenders. 

 

If interest rates slow down spending enough, the country could go into a recession. While recessions are by definition short-lived, they can be incredibly painful.

From a business perspective, recessions can mean less revenue as people tighten their spending because they can’t use debt to buy things. Further, people with existing debts will likely need to severely lower their spending to accommodate higher repayment costs caused by interest rate swings. 

This means your business could be in the dual situation of having both lower revenue and limited access to debt. 

 

Don’t panic!  Here’s 16 Solutions for Businesses to Navigate High Interest Rates

While a higher interest rate environment can make business a little more difficult, there are opportunities you can take advantage of.

 

Whether it’s getting a home equity line of credit, refinancing your home, or needing support in finding a government-based assistance program, our business advisors can tell you which options you qualify for.

If you’re concerned business may dip, review your company’s fixed expenses to see identify areas where costs can be reduced, eliminated or better managed. Also name your variable expenses so you can get a better sense of how expenses might go down if business also drops.

•   Gather expense data: Collect all relevant financial records, such as receipts, invoices, credit card statements, and bank statements for a specified period, usually a year or a quarter.
•   Categorize expenses: Group expenses into categories, such as office supplies, rent, utilities, travel, meals, and entertainment.
•   Analyze spending patterns: Review each expense category to identify areas where costs are high or rising. Compare current expenses with previous periods or industry benchmarks to see if the company is overspending or underutilizing resources.
•   Identify cost-saving opportunities: Look for ways to reduce expenses without sacrificing quality or efficiency. Examples include renegotiating contracts with vendors, switching to more cost-effective suppliers, or implementing energy-saving measures.
•   Set expense goals: Establish targets for reducing expenses by a certain percentage or dollar amount within a specific timeframe. This helps businesses stay focused and track progress towards their cost-saving objectives.
•   Implement expense controls: Put in place measures to monitor and control expenses, such as expense policies, spending limits, and approval processes. This ensures that employees adhere to the company’s expense guidelines and prevents unauthorized or excessive spending.
•   Review and adjust regularly: Conduct regular reviews of expenses to ensure that cost-saving measures are working and adjust as needed to stay on track towards meeting financial goals.
•   Also ensure wasteful practices aren’t affecting your bottom line. With nearly a third of small businesses ranking cutting costs wherever possible as their number one immediate priority, they should look to find efficiencies in daily operations to ensure they’re maximizing revenue.

By following these steps, businesses can effectively conduct an expense audit and identify opportunities to reduce costs and improve their bottom line. If you need an Accountant to walk you through your first Expense Audit, contact Phoenix Management Group. 

Debt-fueled spending may involve taking out loans to finance capital investments or expansion projects, with the goal of generating more revenue and profits in the future. However, if the business is unable to generate sufficient revenue to cover the cost of the debt, it may become insolvent.

If you currently spend with debt, consider lowering that spending amount so you aren’t impacted by higher interest rates.

One caveat is that using debt to buy revenue (for instance, another cash-flowing business) can be a good idea in any environment. In all cases, it’s critical to run your own analysis to ensure whatever debt load you have is a good idea for you and your business.

If your business is dependent on borrowing to maintain its operations, you may need to adjust your pricing strategy to account for higher interest rates. This can help maintain profitability even if the cost of borrowing increases. Consider these strategies:

•   Competitive pricing: Set prices based on what competitors are charging for similar products or services.
•   Value-based pricing: Set prices based on the value that the product or service provides to the customer.
•   Dynamic pricing: Adjust prices based on market conditions, such as supply and demand, or based on the customer’s behavior, such as past purchase history.
•   Discount pricing: Offer discounts for bulk purchases or for customers who meet certain criteria, such as being a member of a loyalty program.
•   Price skimming: Set prices high at launch to capture early adopters, then gradually reduce prices over time as the product or service becomes more widely adopted.
•   Psychological pricing: Use pricing tactics such as odd pricing (e.g. $4.99 instead of $5) or prestige pricing (e.g. luxury goods priced higher to imply higher quality).

From both a business and personal perspective, it’s good to have a safety net of three to six months of expenses tucked away so you can continue to operate your business and continue to survive personally in case of unexpected events, financial hardships or recession. Here are some steps businesses can take to build an emergency fund:

•   Determine the size of the emergency fund: The size of the emergency fund depends on the size of the business, its expenses, and the risks it faces. Typically, a business should aim to have three to six months’ worth of expenses in its emergency fund.
•   Set up a separate account: To avoid spending the emergency fund on other expenses, businesses should set up a separate account for the fund. This account should be easily accessible, but not too easy that it can be spent on non-emergency expenses.
•   Determine a regular contribution: The best way to build an emergency fund is to make regular contributions. Businesses can determine an amount they can comfortably contribute on a regular basis, such as monthly or quarterly.
•   Cut unnecessary expenses: To free up more money for the emergency fund, businesses can cut unnecessary expenses. This may involve reviewing expenses, negotiating with suppliers, or finding ways to reduce overhead costs.
•   Increase revenue streams: Another way to build an emergency fund is to increase revenue streams. Businesses can look for opportunities to generate more income, such as offering new products or services, expanding their customer base, or increasing their marketing efforts.
•   Review and adjust: Businesses should regularly review their emergency fund and adjust it as needed. This may involve increasing or decreasing contributions, changing the size of the fund, or adjusting the investment strategy.

If profits are good right now, store some cash to take advantage of any business opportunities that arise, since debt may not be readily available or affordable.

Building an opportunities fund can be a wise move for businesses looking to ensure their long-term success and growth. Here are some steps businesses can take to build an opportunities fund:

•   Identify the purpose and scope of the fund: Determine the specific purpose of the opportunities fund, such as investing in new markets or technologies, expanding the business, or acquiring other companies. Set clear goals and expectations for the fund and decide on the amount of money that will be allocated to it.
•   Evaluate current financial situation: Assess the current financial situation of the business to determine how much money can be allocated to the opportunities fund without jeopardizing the day-to-day operations of the business. It is important to ensure that the fund is built on a solid financial foundation.
•   Establish a regular savings plan: Create a regular savings plan to contribute to the opportunities fund. This can be done by setting aside a percentage of profits, sales, or revenue. The amount of money saved can be adjusted based on the performance of the business.
•   Consider alternative funding sources: Consider alternative funding sources, such as loans or investments, to supplement the opportunities fund. This can help accelerate the growth of the fund and increase the amount of money available for investment opportunities.
•   Manage the fund effectively: Manage the opportunities fund effectively by setting clear investment criteria, establishing a decision-making process, and monitoring the performance of investments. Regularly review and adjust the fund to ensure that it is aligned with the business’s goals and objectives.
•   Seek professional advice: Seek the advice of financial professionals, such as accountants, financial advisors, or investment managers, to ensure that the opportunities fund is managed effectively and in compliance with applicable laws and regulations.

If you do take on debt, consider a revolving line of credit rather than a fixed loan. 

A revolving line of credit can be preferable to a fixed loan in several ways:

•   Flexibility: A revolving line of credit allows you to borrow funds as needed, up to a pre-approved credit limit, and repay the borrowed amount on a schedule that works for you. This gives you the flexibility to borrow only what you need, when you need it, and pay it back at your own pace. A fixed loan, on the other hand, gives you a lump sum of money upfront that you must repay on a set schedule, regardless of whether you need all the money at once or not.
•   Cost-effective: With a revolving line of credit, you only pay interest on the amount you borrow, not on the entire credit limit. This can be more cost-effective than a fixed loan, where you pay interest on the entire loan amount from the start, even if you don’t need all the money immediately.
•   Access to funds: A revolving line of credit gives you ongoing access to funds, which can be useful if you have ongoing expenses or unexpected cash flow needs. With a fixed loan, once you’ve used up the funds, you have to apply for a new loan to access more money.
•   Credit score impact: Revolving lines of credit can positively impact your credit score, as they show that you have access to credit and can manage it responsibly. Fixed loans can also have a positive impact on your credit score, but they tend to have a larger impact at the start of the loan term and then taper off over time.

We can let you know if you qualify for a business line of credit with any of the banks.

When interest rates rise, some businesses may experience financial difficulty or may become insolvent.

When an asset is distressed, its market value is often significantly lower than its book value, making it an attractive investment opportunity for investors looking to purchase assets at a discount.

If you’re in a strong cash position or are willing to take on some debt or sell equity, you may be able to acquire these businesses for much cheaper than if you’d purchased them when they were strong. While you take on the other organization’s debt in the short term, you could end up significantly benefitting when the economy turns back around.

Investors who purchase distressed assets often do so with the intention of turning them around by restructuring or repositioning them to improve their financial performance. This can involve a variety of strategies, such as reducing costs, renegotiating debt agreements, or selling off non-core assets.

Overall, investing in distressed assets can be a high-risk, high-reward strategy, as the potential for significant returns is often accompanied by substantial risk. As such, it requires a thorough understanding of the underlying asset and the market conditions that led to its distress.

In addition to taking advantage of low-rate loans for planned purchases, businesses should evaluate the risk associated with any variable rate loans they currently hold. This is because, in a rising interest rate environment, variable loans can be a significant and sometimes overlooked source of risk.

To evaluate their current debt, business leaders should review the terms of any variable loans to determine how much rates could increase, how much that could cost in additional interest, and how often increases could take place. Variable interest rate loans that allow for multiple rate increases or have rate caps that are much higher than the current rate generally carry the most risk.

Some variable loans contain the option to convert to a fixed rate. Converting at a lower interest could save money in the long term. For variable loans that do not contain a conversion option, businesses should weigh the pros and cons of replacing those loans with fixed rate loans to capture a low rate when it is available.

If you need help with these calculations, drop us a line. 

Businesses whose products are sensitive to changes in interest rates, such as large ticket items that consumers typically finance, can anticipate lower sales as interest rates rise. In response, businesses in these sectors may consider slowing production to avoid manufacturing excess products.

In addition, business leaders can increase advertising and work to improve sales techniques to capture more market share and counteract slowing sales.

When rates go up, the value of the dollar can increase against other currencies. For businesses that source their materials from foreign countries, this could mean lower prices on imports. On the other hand, businesses that sell their products in foreign markets could receive less money from export sales.

Depending on their sourcing strategies and target markets, businesses could have differing responses to a stronger dollar. Those whose inputs cost less when the dollar is stronger, could see higher profit margins. For businesses with international sales, leaders may want to consider raising prices to account for losses during currency conversion.

As interest rates rise, some essential expenditures could cost businesses more. Things like buying and renting property or equipment could become more expensive due to increased borrowing costs.

Additionally, as inflation has increased, wages have gone up as well. This means that businesses could have to pay more to recruit new employees and could have to increase wages to keep current employees. To prepare for these higher expenses, businesses should consider increasing their cash reserves.

When businesses increase their reserves in response to higher prices, their operations are less likely to be disrupted in the short term. Also, by relying on cash reserves to meet price increases, businesses can reduce the probability that they will have to borrow funds at the higher interest rates to keep their businesses afloat.

There are several ways companies can increase their cash reserves in times of inflation and higher expenses. Here are a few strategies:

•   Increase sales: One way to increase cash reserves is by increasing sales. Companies can achieve this by expanding their customer base, improving their marketing strategies, and launching new products or services. By increasing sales, companies can generate more revenue, which can help offset the impact of higher expenses.
•   Reduce expenses: Another way to increase cash reserves is by reducing expenses. Companies can achieve this by implementing cost-cutting measures, such as reducing overhead costs, renegotiating contracts with suppliers, and optimizing their supply chain. By reducing expenses, companies can free up cash that can be used to build up their cash reserves.
•   Raise prices: Companies can also consider raising prices to offset the impact of inflation and higher expenses. However, this strategy should be implemented carefully to avoid losing customers to competitors. Companies should also monitor consumer demand and adjust their prices accordingly.
•   Improve cash flow management: Companies can improve their cash flow management by implementing effective cash management policies. This can include strategies such as accelerating collections from customers, delaying payments to suppliers, and optimizing inventory levels. By managing cash flow more effectively, companies can build up their cash reserves.
•   Access financing: Finally, companies can access financing to build up their cash reserves. This can include obtaining a line of credit, issuing debt or equity, or securing a loan. However, companies should carefully evaluate the costs and risks associated with these options before pursuing them.

Another positive side effect of businesses increasing their cash reserves is they will generally pay more in interest when market interest rates rise. By investing in interest rate sensitive products, businesses can take advantage of higher rates by earning more on their cash reserves. But remember, not all deposit accounts are created equal.

Business owners should keep ‘digital’ at the top of their minds moving forward, as the global economy and advances in technology have created a giant world market with an array of new commerce opportunities to tap into. Business owners should be looking to spot those new opportunities. 

Case in point:

More than 80% of small businesses surveyed said they received some form of financial help from the government during the pandemic and some of those relief loans are set to come due next year.

Working on a replacement strategy now is one of the best practices owners can follow.

(We will keep you updated about the CEBA loan repayment and other loan options in our newsletters and blog posts).

While these are challenging times for small businesses across Canada, we would strongly encourage small business owners to talk to a Small Business Advisor who is equipped with the right tools and knowledge to help them navigate the complications and concerns that may arise in this changing economic environment.

Book a call with us today! 

At PFG Financial, we keep our finger on the pulse of new developments in interest rates and the banking industry. To stay abreast of these topics, check out our Blog and follow us on Social Media!

 

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