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It is only natural to want the economy to do well when you own a small business. A robust stock market, increased housing prices, and substantial manufacturing numbers, among other economic indicators, lead to greater confidence among business owners and consumers. That means more sales opportunities for your small business as economic upticks lead to more discretionary spending and investing.
However, a strong economy also means the possibility of interest rate hikes by the Federal Reserve. Rate hikes are made to help manage inflation and boost spending. Unfortunately, when interest rates climb, so does the cost of borrowing capital. If you wonder how to deal with rising interest rates, this Balboa Capital blog article can help.
Get a fixed-rate business loan.
When applying for a small business loan, you will have two loan options: fixed and variable rates. If you opt for a fixed-rate loan, you will not need to worry about your monthly loan payment increasing. Instead, you will pay the same monthly amount throughout your loan, which helps you better manage your cash flow. However, that might not be the case if you choose a variable-rate loan, also referred to as an adjustable-rate loan.
Instead of having predictable monthly loan payments, the rate on your business loan will be determined by the daily prime rate set forth by the Federal Reserve. In addition, the interest rate could go up or down depending on how the economy is performing. So, if you want security and no surprises down the road, a fixed-rate business loan is your best choice.
Refinance a variable-rate business loan.
A variable-rate business loan can save you money if you get it at the right time. For example, if you secure a variable-rate loan during an economic downturn or a recession, you will probably have low-interest rates. If the economy is sluggish and does not rebound, the interest rates can stay low for an extended period. But once a glimmer of economic hope starts shining, things can change.
The good news about the economy and jobs, or a positive change in gross domestic product, can result in higher interest rates. As a result, the comfortable loan payment you are used to making can increase without warning. If your variable-rate business loan becomes a severe financial burden, consider getting it refinanced with a fixed rate. Although there are fees to refinance a small business loan, you might be able to lock in a reasonable rate and get back to having manageable payments.
Consider raising your prices when interest rates rise.
When you started your business, figuring out what to charge for your products or services was probably tricky. After trial and error, not to mention customer feedback and competitor research, you finally got your prices set. However, you cannot maintain the same prices for your business to grow. You need to evaluate your expenses and overhead to make sure you are making enough profit.
It would help if you determined how customers might perceive your price increases. They can either accept it or look elsewhere. A slight price increase is warranted if your business provides good perceived value. Remember, your customers choose your business based on its value, quality, and service; they are not comparing you to companies with lower prices. Many businesses raise their prices during times of strong economic growth when interest rates are typically higher.
It costs more to obtain small business funding to invest in equipment, technology, materials, and employee salaries. Modest price increases help businesses control costs; they help increase gross margins and improve cash flow. Finally, raising your prices is risky, so put a lot of thought into it. Consider your current expenses and future expenses, and be prepared to explain your price increases to customers who contact you via telephone or email wanting an explanation.
Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses the Federal Reserve. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.