Rising Interest Rates
Can Be a Shock for Small Businesses

Recent Prime Rate increases by the Federal Reserve are guaranteed to be a serious blow to most small businesses. However, there are strategies that can help, at least a little.

First, nearly all small businesses carry outstanding loans, so when interest rates rise, those loans become more expensive. In nearly all cases, these are long-term loans that are going to take years to pay off, so any increase in interest rates means that you're going to hold the debt longer and pay more money.

Your customers are also likely to be paying more. And like you, those cost increases won’t be just for loans but other costs as well. So even if they can afford to pay increased fuel, food and other costs, they’re liable to have less ready cash to purchase your goods or services.

That’s a pretty bleak picture, and a big reason that several are now forecasting a recession. Even if those predictions aren’t fully realized, it’s likely we’re going to be in for tough times for the foreseeable future.

But there is good news. One is that “foreseeable future” isn’t eternity, or even the rest of your life. Even a deep recession is usually a short-term downturn. History shows that most last roughly a year, and some are as short as a few months.

There are also strategies that you can use to limit the impact on your and your business. One to pay off any short-term loans you have outstanding. If you’re like most small businesses, you probably have some loans through your business or personal credit cards. The smart move is to pay off that debt now. Credit cards will be one of the first areas to be impacted by the increases and you don’t want to be paying monthly fees, if possible. Depending on your terms, other short-term loans are likely to be close behind. Obviously, paying off variable rate loans is a priority.

Otherwise, you do have some time get things in order, as much as possible. Although the Feds’ action is all over the news, it will take some time before impacts lending and other areas of the economy. Of course, this and other issues will also depend a lot on what business you are in. For example, some areas of the economy will see greater impact than others. We learned that with Covid.

Another good idea is to talk to your banker and, if you don’t have one, find one and get acquainted. They not only can tell you about loan options, but will likely have ideas for small business challenges. They’ve likely seen it before.

Now is also a good time to take a hard look at your business. Have you been carrying products or services that aren’t doing well, but didn’t seem worth hanging onto? This may be the time to drop them. Take a hard look at where you will be if interest rates continue to rise. Above all, be realistic. This is a time for some old advise: hope for the best but plan for the worst. Start looking now at where you can cut costs if you must.

None of this is great new, but like everything else, it will change eventually. We can all hope this challenging time is as short as possible, but regardless of the timetable you have options to help you weather this!