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Austin
The Federal Reserve is expected to continue raising interest rates in 2022 to combat inflation. The prospect of rising interest rates may seem daunting to small business owners, but the reality so far may have been less worrying.
Small businesses’ exposure to rising interest rates can be either direct (e.g., if they have variable rate loans) or indirectly (businesses are impacted by consumers changing purchasing patterns in response to rising interest rates). if you receive it). We’ll start by looking at the specific risks, then offer some tips for preparing for continued rate hikes.
understand the risks
Direct Risk — Floating Rate Debt: Business owners with variable interest rates on loans and credits are most exposed to rising interest rates. Floating interest rates, also known as floating or variable interest rates, fluctuate over time based on economic conditions. Interest rate increases may result in higher interest payments on loans, lines of credit (LOCs), or variable rate credit cards, and therefore may increase the total amount of these liabilities.
Indirect Risks — Changes in Consumer Spending: In addition, higher interest rates generally mean that consumers choose to save money and cut spending in order to earn higher rates of return. increase. This behavior usually contributes to lower demand for goods and services. Some companies will benefit from these value-oriented trends. Other companies should take steps to strengthen their operations.
Assess your exposure: Now is the time to identify the most relevant risks for your business. Start by reviewing the terms of your business loan, LOC, or business credit card to determine if the interest rate is fixed or if you contact your lender or bank.
Preparing for rising interest rates
Deal with outstanding debt at variable interest rates: The higher the interest rate, the longer it will take to pay off your debt. To prepare, pay off your loan or LOC as soon as possible. If you can’t pay off all your debt, renegotiate your terms to lock in a lower interest rate today. Also, consider transferring business and personal credit card balances to lower interest cards or loans.
Change your cash management strategy: If you have excess cash on hand, consider shifting it to CDs, money market accounts, savings accounts, or other means that are less risky and benefit from rising interest rates. These vehicles accumulate more interest as interest rates rise.
Evaluate your financing plan for growth: Higher interest rates mean higher borrowing costs. As a result, it can be difficult to raise funds to extend or cover unexpected expenses. Consider looking for fixed rate loans backed by the Small Business Administration (SBA) or other lenders. This protects you from future interest rate increases.
Plan ahead for changes in consumer spending: If your industry is likely to be impacted by reduced consumer spending, target your most loyal customers or offer special promotions to attract traffic Consider stepping up your marketing efforts, such as
Careful management of cash flow is even more important than usual when navigating a changing interest rate environment. As you take these steps to prepare for higher interest rates, remember the potential silver lining. Interest rates are rising to keep inflation under control and stabilize the economy. Both can have a positive impact on your business in the long run. Higher interest rates also mean that it costs more to borrow money, but you can also receive higher payments on interest-bearing assets.
Dale Austin is Senior Manager at Wells Fargo Boise Metro Regional Bank.
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