When you own a small business, it’s only natural to want the economy to do well. A robust stock market, increased housing prices, and strong manufacturing numbers, among other economic indicators, lead to greater confidence among business owners and consumers. That means more sales opportunities for your company, 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. This is done to help manage inflation and boost spending. When interest rates climb, so too does the cost of borrowing capital. But there are some things you can do. This Balboa Capital blog article highlights three strategies for small business owners to consider when interest rates rise. We think you will find them to be quite helpful.
1. Get a fixed rate business loan.
When applying for a small business loan, you will have two loan options presented to you: fixed rate and variable rate. If you opt for the fixed rate loan, you won’t need to worry about your monthly loan payment increasing. You will pay the same amount each month throughout the life of your loan, which helps you better manage your cash flow. That might not be the case if you choose a variable rate loan, which is 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 as set forth by the Federal Reserve. Simply put, the interest rate on your loan could go up or down depending on how the economy is performing. So, if you are want security and no surprises down the road, a fixed rate business loan is your best choice.
2. 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 doesn’t rebound, the interest rates can stay low for a long period of time. But once a glimmer of economic hope starts shining, things can change. 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 ever becomes a serious financial burden, consider getting it refinanced with a fixed rate. Although there will be fees involved with refinancing a small business loan, you can lock in a good rate and get back to having manageable payments.
3. Consider raising your prices.
When you started your business, figuring out what to charge for your products or services was probably very difficult. After a little bit of trial and error, not to mention customer feedback and competitor research, you finally got your prices set. But in order for your business to grow, you can’t maintain the same prices. You need to evaluate your expenses and overhead to make sure you are making enough profit. Of course, you also need to think how a price increase will impact your business in terms of your customers. They can either accept it, or look elsewhere. If your business provides good perceived value, a small price increase is warranted. Remember, your customers are choosing your business based on what it offers in terms of value, quality and/or service; they are not comparing you to companies with lower prices. Many businesses raise their prices during times of strong economic growth, which is when interest rates are typically higher. Reason being, it costs more to borrow money, and invest in things like equipment, technology, materials, and employee salaries. Modest price increases help businesses control their costs; they help increase 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.