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5 Things Businesses Should Consider in a Higher Interest Rate Environment

By Diane Amato

Published March 3, 2023 • 5 Min Read

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.

1. 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.

2. 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.

  • 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.

3. 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.

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.

4. 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.

5. 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.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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