Over the last 12 months, the Bank of Canada raised interest rates seven consecutive times, from 0.25% to 4.5%. Higher rates affect business owners in different ways. Consider these tips to adapt to today’s climate.
Today’s interest rate environment is a game-changer for many businesses — on many levels. For highly leveraged businesses, the increased cost of borrowing may put a perceptible squeeze on the operating budget. For those with investable assets, there’s an opportunity for growth.
Here are five ways to weather the downside of higher rates and take advantage of the upside where you can find it.
Re-think your savings strategy
While many business owners parked excess cash in their business bank account to help ride out the pandemic, additional funds may have a better home today. Years of low interest rates have delivered minimal growth for GIC investors; but, as rates have risen, more competitive GIC rates offered by financial institutions mean more attractive returns for a safe, fixed-rate investment.
If you accumulate funds from recent sales and contracts, consider a savings strategy with flexible terms — whether your goal is to earn interest while the funds are sitting in your account in the short term or to actively shore up your savings for future capital equipment or anticipated expenses in the mid- to long-term, advises Joanne Ironside, Senior Relationship Manager Business Markets at RBC.
Focus on what you can control
You can’t control interest rates — and trying to predict them isn’t viable either. So, if higher rates are eating into your bottom line, it’s a good idea to try to offset them with lower expenses elsewhere in your business. Here are a few ways to find savings:
- Reduce your fixed and variable costs. Consider if there are ways to downsize your office space, optimize your inventory or negotiate terms with your suppliers that can boost your cash flow.
- Read 5 Tips to Help Find Hidden Savings and Offset Rising Business Costs for more ways to help maintain profit margins in today’s environment.
- Assess your business credit cards and loans. Try to save on interest costs by paying your balances on time. At the same time, find ways to maximize your business card’s potential by using rewards points for business essentials.
- Utilize tax credits and non-repayable government grants. ‘Free money’ can also come through value-added partnerships and no-cost resources available to business owners online.
- Related story: 5 Ways Grants Can Help Grow Your Business in 2023
- The Canada Digital Adoption Program (CDAP) offers two grants to help owners leverage technology to get online, reach more customers, operate more efficiently, and propel their businesses forward. Learn more
Understand the pros and cons of fixed and variable rates
When you’re borrowing for your business — a commercial mortgage, a term loan or a line of credit — you’ll want to understand the type of rate you’re signing off on and what the implications are for your business.
- While fixed rate loans generally have higher posted rates, they offer the certainty of a known payment, regardless of whether rates rise further.
- Variable rate loans, meanwhile, will become more expensive to service when interest rates go up — and business owners who have been carrying variable rate debt are feeling the impact of the rate hikes over the past year.
While one of these rate types isn’t “better” than the other, there may be a clear option for your business. It’s worth creating different scenarios based on different rate environments to determine how your cash flow may be affected.
- Watch the RBC Small Business Talks webinar to learn how to incorporate scenario planning into your business plan.
In the meantime, take a moment to ask yourself a few questions as you assess your borrowing solutions:
- Can I afford higher payments on a variable rate loan/mortgage if rates rise again?
- Am I comfortable with the risk that comes with a variable rate product?
- Am I expecting consistent revenue over the near-term? (If so, a fixed rate loan may offer revenue stability.)
Interest rate implications will likely be highest where you do business, as rent or mortgage is typically a business owner’s biggest expense. If you’re weighing your options to rent or buy commercial real estate, RBC’s Should you Rent or Buy Commercial Real Estate? 5 Questions for Business Owners to Ask Themselves can help you decide what’s best for your business.
Create an emergency fund
Business owners are acutely aware that external factors completely out of their control can affect their bottom line. Hence the importance of creating an emergency fund for the future. Aim to save at least three months’ coverage of your fixed costs. If possible, set aside a six-month runway.
- For more ways to future-proof your business during difficult economic times, read 5 Steps to Strengthen Your Business During a Downward Economic Cycle.
Build an opportunities fund
Once you’ve established an emergency fund and your expenses accounted for, try to set aside a cash reserve for opportunities, however small that might be. Remember, even the pandemic offered unique opportunities for business owners who found creative ways to build their businesses and meet customer needs. Being prepared to act on new ideas can help your business weather tougher times.
The Bottom Line
Higher interest rates have made borrowing more expensive for business owners, but they also offer the potential for savings growth (and a reason to look at operating expenses closely). Knowing the impact of rates on your business and understanding the options and opportunities available can help keep your business financially healthy.
By Diane Amato
This article was originally published on RBC’s Discover & Learn blog.
