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Fulton Bank
Fulton Bank

What do rising interest rates mean for your small business?

Many people have had to rethink their personal finances as inflation and rising interest rates affect their cost of living. Small business owners also experience these changes at home, and they have to contend with how higher interest rates can affect their businesses.

Here's a closer look at three ways rising interest rates could make running your business more difficult—and one silver lining for business owners who have cash on hand.


Expect to pay more for new financing


As the Federal Reserve raises interest rates, lenders may respond by raising interest rates on various types of credit accounts. Because small business loans and lines of credit will be more expensive, you'll want to have a solid plan for how you'll put the money to work in your business and your re-payment strategy—before you apply.

Small businesses sometimes have a hard time securing financing, especially when the business is brand new and doesn't have a financial track record. Or if the lender doesn't specialize in working with small business owners.

You may find that it's even more difficult to qualify for a new credit account right now. In part because rising interest rates lead to larger payments. But also because some lenders might pull back or rethink their lending strategy during uncertain financial times.


Reevaluate your current credit accounts


Even if you're not thinking about taking on new debt right now, you might be making payments on outstanding loans and lines of credit.

Many installment loans, such as commercial real estate loans and equipment loans, have fixed interest rates—you won't need to worry about rising rates affecting those payments. But revolving credit accounts tend to have variable interest rates, and these can include business credit cards, lines of credit, merchant cash advances, and some types of SBA loans.


Review your current credit agreements to see whether your interest rates have risen and how that's impacting your loan payments. If you find you're paying more than expected or you worry about rates rising again, it might make sense to refinance accounts. For example, you could take out a fixed-rate business term loan to pay off variable-rate loans.

You can also look for new types of credit that can give you a leg up. For instance, some small business credit cards have 0 percent interest rate offers on purchases or balance transfers for new cardholders.

Using one of these credit cards, you might be able to finance business investments that can improve your efficiency and sales. Or, if you have credit card balances or loans with high interest rates, you could transfer the balances to the new credit card. Then, pay off the balance during the promotional period when the balance doesn't accrue interest.


Prepare for a cash flow crunch


Rising financing costs can have a direct impact on your bottom line. At the same time, inflation could be increasing your expenses, and other businesses and consumers who feel the impact of rising interest rates and inflation might be cutting back. All of this can compound and lead to a cash flow crunch.

To avoid major cash flow issues, try renegotiating payment terms with your vendors, suppliers, and customers. Getting paid faster and having more time to pay bills can give you a little breathing room.


Also, consider how you might be able to improve your margins. Comparison shop suppliers to see if you can lower your expenses and think through where you can raise prices. Customers might not be happy, but it likely won't be a big surprise if certain products or services cost more.

You can review recurring business expenses as well. Saving money on insurance, utilities, office supplies, subscriptions, and other monthly bills can free up money that you can reinvest in the business or take as profit.


A silver lining—earn more interest on your working capital


Although borrowing is now more expensive, banks are also offering higher interest rates on checking and savings accounts. You might be able to earn more money by moving funds to a high-yield account. Or, if you have medium-term plans for the money, consider opening a business certificate of deposit (CD).

Compare small business banks, their rates, and services to see what will work best for your business. A high interest rate might help you earn money on your cash reserves, investments, and working capital. If you have over $250,000 in working capital or savings, you may also be interested in treasury management services that can strategically move your business's funds between accounts to ensure all your money is covered by FDIC insurance.



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