Opinion: 4 ways small businesses can manage high interest rates

provided by Craig Wright

Craig Wright

The Federal Reserve conducts the nation’s monetary policy and has three goals set by Congress: First, maximum employment. Second, stable prices. And third, moderate long-term interest rates in the United States. Since 1994, the Fed has been much more transparent about their intentions in these areas and has consistently provided policy statements and news conferences. The federal funds rate has varied from zero to 6.5% in the past 30 years. Following the September 2023 meeting, the federal funds rate is 5.25%-5.5%.

The Fed has stuck to its plan of continuing to increase interest rates to tame inflation. Most analysts were predicting, as recently as in March, the Fed would be forced to let up and cut rates at the first hint of trouble. The Fed is clearly telling us that until inflation is vanquished, they have no choice but to keep at it and have signaled less easing of policy in 2024. Many economists are now predicting there will be only one 25 basis-point rate cut in 2024.

As the reality of higher interest rates hanging around for longer is slowly setting in, many small-business owners are left to wonder how this will impact their operations and the prospect for growth. Over the past decade-plus, using leverage to gain access to additional funds made financial modeling and decision-making rather easy. The threshold for profitability and return on investment is much easier to cross when you can borrow at 4%-6% instead of borrowing at 8%-12%.

There are several important factors that decision-makers in small businesses need to be mindful of over the coming months as higher interest rates linger: inventory, debt service, cash flow and growth projections.

1. Inventory. Forecasting inventory needs is a constant struggle for most small-business owners. Supply chain interruptions caused massive havoc over the last few years. Keeping an eye toward forecasting future needs will help to keep the costs of inventory lower.
2. Debt service. Most small businesses have short-term notes. Hopefully, your small business was able to lock in low rates with acceptable durations during 2020-21 and you still have some time left before you need to either pay off the debt or refinance it. Find ways to save money over the next few months to prepare for higher interest rates if you are unable to pay off the note at maturity. Forecast what the new payment will be and begin setting aside the monthly difference now. This will make it much easier to pay the higher rate when it comes, and you’ll also have a pot of cash sitting around for other opportunities or emergencies.
3. Cash flow. Successful small businesses have quality, predictable cash flow. Knowing what to do with that cash flow is one key differentiator between successful and unsuccessful small businesses. How have your customers been impacted by sticky inflation? Are you seeing less spending? Where is the breaking point for how much of your own inflation you can pass on to customers? Each business will have different answers to those questions, but understanding your own reality with those answers will allow you to better predict future cash flow to help ease your interest rate burden.
4. Growth projections. Wouldn’t it be great if your business grew in a nice straight line like the business plan you provide to your banker shows? Unfortunately, reality sets in for most businesses, and the growth line is often squiggly and erratic. Take the time to reflect on the past 36 months and how you’ve adapted to an ever-changing world. As you look at your future cash flow and how the debt you have will be serviced at higher rates, take note of what growth you’ve had and can expect to have going forward.

There are a lot of headwinds in the current economy, but your business has a choice. You can either passively accept what is going on around you or you can actively choose to take the opportunities that are in front of you by the horns and develop creative ways to accelerate your business to the next level.

Craig Wright is a financial adviser at Strategic Financial in Springfield. He can be reached at
cwright@thestrategicfinancial.com.