Co-Founder / Partner at Lendzi.
Financing is the lifeblood of any business. But almost as important as having access to capital is the ability to get financing at low interest rates. With inflation jumping 7.5% over the past year, the Fed is likely to get even more aggressive in terms of raising interest rates in 2022. That could prove disastrous for businesses on thin margins, as a significant increase in interest expense could mean the difference between profitability and loss. Fortunately, there are some steps that you can take as a business owner to mitigate the added expense that rising interest rates will create.
1. Get Financing Now Before Rates Rise
While you should never take financing if you don’t need it, if you anticipate any funding needs at all over the next few months, you should strike now. If the Fed raises rates by 2% or more over the course of the year, as some pundits predict, rates on commercial financing could skyrocket. If you wait six months before you get your financing, you could end up with thousands of dollars of extra interest expense this year for nothing. Rates are already going up in anticipation of the Fed raising rates by 50 basis points or even more at its next meeting on March 15-16, so the sooner you could make a move, the better.
2. Convert Existing Variable-Rate Loans Into Fixed-Rate
If you’ve been financing your business with variable-rate loans over the past few years—congratulations! You’ve done a great job keeping your interest expense low, as variable-rate loans have been close to zero depending on the type of financing you obtained. But now is the time to dump these variable-rate loans and switch into fixed-rate options if at all possible. Variable-rate loans reset rapidly and often violently in reaction to rising market rates, so you’ll want to jettison that risk before the costs eat up your company’s free cash flow.
3. Consider Alternative Financing Options
In decades past, businesses were somewhat restricted as to the types of financing they could acquire. Traditional term loans from well-established banks were the norm until fairly recently, and while those can still make sense for some companies, there are now plenty of other options to choose from. Invoice factoring, merchant cash advances, equipment financing and SBA loans are just a few of the ways you can raise money for your business, and online lenders can often provide a lower-cost solution than traditional brick-and-mortar institutions. While rates will be going up on these types of financing as well, they can prove to be better solutions for some companies and may offer you some additional flexibility in terms of meeting your needs.
4. Raise Additional Capital
One option to avoid financing issues altogether is to raise additional capital by selling equity. While you’ll dilute the ownership of your company, you won’t have to pay any interest on the capital you raise, which may actually give you a competitive advantage.
5. Speak With Experts Who Have Been Through Rising-Rate Cycles
If your company is relatively new, you’ve likely only experienced a low interest rate environment. In one sense, this means that you started your business at the right time, as you were able to get up and running with minimal interest expense. However, your company may not be prepared to handle significantly higher financing costs. To make sure that you’re prepared to weather any storms, it’s best to consult with financing experts who have been through both the lows and the highs of previous interest rate cycles. The best consultant won’t work for a specific firm but will have access to quotes and rates from a number of different lenders offering a variety of financing options. Once presented with all of the facts and figures, you and the specialist should go over all of your choices to help you find the type of financing that best suits your business.
The landscape for business financing is ever-changing. But the path forward in 2022 has already been laid out in comments by the Federal Reserve and in the rapidly increasing inflation numbers. As rates are on the rise, it pays to take action now if your business is in need of financing. Checking out all of your available options, speaking with an expert in the space and being proactive now are all important steps to ensure that your business raises the capital it needs in the most inexpensive way possible.