Interest rates have been at an all-time historic low for quite a while now. This has been great for many small businesses, but the base rate can’t stay low forever and indications are the base rate will rise by at least 2 per cent over the next three years. This will be good for savers, but definitely not good for small businesses and home owners. So how can you protect your business against the inevitable interest rate rises to come?
Draw up a Budget
It would be financial suicide to try and run a business without any kind of financial planning. Drawing up a budget helps you to stay in control of expenditure, but with rising interest rates on the horizon, it is even more important to keep a tight rein on the finances. Make sure you plan for rising interest rates – any credit arrangements you have in place will be more costly, so this needs to be planned for when casting short and medium term cost projections. It is also sensible to have a cushion in place to protect you from interest rate rises.
Pay Off Debt
With interest rates still very low, now is a good time to try and pay off any debts you have. The more debt you have, the more you will be affected when interest rates rise. For example, if you own a retail construction company and you have recently invested in some new plant, a sudden rise in interest rates could cripple your cash flow if the plant was purchased on credit. So where possible, pay down debt to protect the business.
If you are not in a position to pay down debt, look around for better finance deals. All too often, small businesses don’t bother shopping around for more competitive finance deals. Instead they stay with the same lender for the entire term of the loan, even when it could be more economical to switch to a different provider.
Investigate Different Types of Financing
Big name lenders may be your first port of call when you need to organise a business loan, but there are plenty of other financing alternatives if you need some extra cash. Peer to peer lending is a good way of raising finance. Alternatively, look into invoice financing. Or, if you are a limited company, you will be able to apply for equity financing.
Rising interest rates are going to affect mortgage payments, and not in a good way. This won’t just hit you on your residential mortgage repayments – it will also affect any commercial loans you happen to have. If interest rates rise by two or three per cent, monthly repayments could rise significantly, so now would be a good time to investigate your options. If you are not locked into a current arrangement, check out other deals, but if you are, make sure you plan for any future rises in mortgage costs when calculating cash flow projections.
Rising interest rates are likely to affect most businesses, but if debt is a large component of your long term capital structure, you need to make plans to deal with this sooner rather than later.