Tips For Small Business Owners To Tackle High Interest Rate

An image of a couple small business owners in Burlington coming to grasp with the rising interest rates.

Today, Canada and all major economies are experiencing high interest rates as central banks have increased rates to curb inflation. These rates are likely to stay for some time before any rate cuts. These are challenging times for consumers and small businesses as servicing loans, mortgages, and credit cards becomes expensive.

The high-interest rate increases the borrowing cost and could affect other aspects of the business. For instance, interest-sensitive companies, like real estate or auto dealers, could see consumer demand fall. Expenses could rise if you rely on overdrafts and short-term loans for working capital. Difficult situations allow small business owners to re-evaluate their capital and business needs and improve efficiency.

How Small Business Owners Can Tackle High-Interest Rate

This article will discuss various alternatives small business owners can consider to tackle high interest rates.

Re-evaluate Borrowing costs and Restructure Debt.

Between 2020 and 2021, floating-rate loans were trending as the interest rate was at a record low. But now the tide is in favour of fixed-rate loans. Evaluate your debt and see if it is possible to switch from a floating rate to a fixed rate before high borrowing cost dries up your cash flow.

If you have a high-rate loan like a credit card, consider refinancing it with a lower-rate loan with a similar or shorter payment period. A professional accountant can help you work out the maths and cost savings opportunity a restructuring or a switch could bring.

Re-look Cost Cutting Opportunities

A high interest rate is also an opportunity to look at your business from a new angle and save costs where possible, especially the fixed overhead costs. How to go about it?

First, review your cash flow and highlight the expenses where you have scope to evaluate alternatives. Start with the most significant and end with the smallest. For instance, if you own a huge working space, you could reduce your occupancy and rent out some space to other businesses. If you are on a lease, you can renew it with a smaller space.

You could use a hybrid model, wherein employees work alternate days from home and office or use a shared desk space. Where possible, consider outsourcing activities to contractors that can do the job at a lower cost. You can also shop for cheaper software or broadband plans and cancel subscriptions that are not in use.

A skilled accountant can help you identify such cost-cutting opportunities in your income and cash flow statement.

Look For Opportunities To Increase Prices

In a high-inflation environment, you could consider increasing prices and improving profitability. But increase the prices tactfully so that your consumer can absorb them. Go back to your books of accounts and calculate the gross margins of products or services. You could increase your volumes in high-margin products and consider rising prices by offering slightly better variations of the products or services.

This way, customers could get the value for the amount paid, and you could earn some extra money. And if no such opportunity is available, consider increasing your prices alongside the increase in cost to maintain the margins.

Consider Having Extra Working Capital Reserve

Keep more cash reserve in a high-interest-rate environment to meet your working capital needs. It could come in handy to pay bills and salaries. Funding a business with cash reserve is cheaper than with borrowed money.

Review Your Business Through Budgeting And Forecasting

The whole process of reviewing your business and personal finances begins with budgeting, financial projections and funding. Small business owners can use last year’s financial statements and make projections for different scenarios like interest rates rising, rates remaining unchanged, and interest rates falling for three, six, and 12 months or more. You can create scenarios as per your business and industry.

Scenario planning can give you an idea about your business finances, how long cash reserves can sustain in which environment, and whether you should seek funding.

Budgeting and forecasting a planning tool. Keep altering the scenarios to reflect the changing economy and business environment. And a professional accountant can help you with this.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You Plan Small Business Finances 

Talk to a professional accountant to help you identify opportunities to cut costs, restructure debt and sustain a high-interest-rate environment. At Edelkoort Smethurst CPAs LLP, our accountants can provide services such as budgeting and forecasting. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting expertise, contact us online or by telephone at 905-517-2297.