Here’s how small business owners can manage their finances when interest rates rise
Two weeks ago, the Federal Reserve announced a 75 basis point hike in a key rate: its federal funds rate, which banks charge each other to borrow or lend excess reserves overnight. Fluctuations in this rate affect interest rates throughout the banking system. It is therefore not surprising that since the announcement, rates for consumers and businesses have increased.
For example, a 30-year fixed-rate mortgage now averages 5.81%, down from 3% a year ago, and the prime rate – which is the interest the bank charges its best customers – applied by financial institutions such as Bank of America is now at 4.75% compared to 3.50% last March.
Clearly, interest rates are rising, and many economists believe rates will continue to rise as the Fed battles both inflation and a slowing economy. For a small business like mine, all of this means higher costs to maintain debt and borrow additional funds. It may also lead to a decrease in available capital. So what can we do now to prepare?
For beginners, small business owners should ensure that we pay off our credit card debt and any other higher interest loans with variable rates. The interest on this debt could become very expensive. If you are able to repay these higher rate loans, do so. If not, try converting that debt – or some of it – into longer-term loans with fixed interest rates, even if that means giving collateral to secure those loans.
“Rising debt servicing costs can be a large and unexpected impact on cash flow and preparing for it early is crucial,” said Clifford P. Haugen, financial adviser at BLB&B Advisors LLC in Montgomeryville. “If a small business owner hasn’t reviewed their loan terms recently, now is a good time to do so.”
If you need financing, you’ll find the best rates (and the best chance of approval) with government-backed Section 7(a) and 504 loans offered by lenders approved by the US Small Business Administration. Or if you are a Philadelphia-based company, check with the Philadelphia Industrial Development Corporation.
Also, try taking advantage of the State Small Business Credit Initiative, where — thanks to the American Rescue Plan Act 2021 — more than half a billion dollars is being made available to businesses in Pennsylvania, New Jersey and Delaware in over the next few months by the federal government. government through local lenders and community organizations.
Interest rate increases will increase your cost of borrowing. But there’s a silver lining: the potential to increase your income if you manage your money wisely. Savings account rates aren’t rising significantly yet, but they will. Talk to your banker and create some higher yielding checking or money market accounts and start sweeping any excess cash there.
Consider putting all the money you don’t need for six months or a year in FDIC-insured certificates of deposit, which typically pay higher interest but lock in your funds for a period of time. Also consider short term US Treasuries until interest rates start to rise.
“The three-month US Treasury ended the week at 3.35% – levels we haven’t seen in almost 15 years,” Haugen said. “With inflation well above these levels, these are still negative real returns. to hold the bonds until maturity seems quite attractive.
If you’re willing to take a little more risk and can invest for the long term, consider moving your excess cash into mutual funds that invest in blue-chip, dividend-paying stocks, which have historically proven to be superior. to interest income.
“I advise my clients to rebalance their accounts,” said Steven Kalodner, wealth adviser and portfolio manager at financial services firm UBS in Mount Laurel. “That can often involve buying some blue chip dividend paying companies.” Kalodner warned, however, that the stock the market could reach “new lows this year” and that investors should be “slow to buy many stocks except the best of the best”.
While we’re on the subject of money, we should all do our best to handle it better.
This means stepping up our credit and collection activities to ensure that our open receivables are not past due for more than 30 days or even less, if possible. The longer our invoices remain open, the less interest we have receive on our money. I advise my clients to try to take advantage of vendor discounts for early payment, as these discounts can often earn more than the interest paid by a bank.
The most important thing in these times of rising interest rates and inflation is to work with someone experienced in the financial markets because, as Kalodner believes, no investment is right for everyone. : we are all at different stages of our professional and personal lives. Lives.
“Markets today are very volatile and interest rates are the highest they have been in several years,” he said. “I strongly suggest business owners speak to their financial advisors and come up with a plan if they don’t have one that would outline what investments they should own.”
Gene Marks is a Chartered Accountant and owner of Marks Group, a technology and financial management consultancy firm in Bala Cynwyd.