Charles R. Kennedy, CPA, MBA
Vice President & Director of Tax Services

Interest rates can have a significant impact on businesses, as we have seen over the past year. And often, smaller businesses feel the impact first. Profit margins and cash reserves can take a significant hit from rising interest rates, and the implications for cash flow can be severe. Strategies to weather a high interest rate environment are important for businesses and individuals to explore. 

Economists believe interest rates have likely peaked and will decline in 2024. How quickly they will come down and what impact that will have on the broader economy remains to be seen. The inflation rate for the 12 months ended in September 2023 was 3.7%, compared with a 12-month average of 6% in February 2023. So high interest rates – as painful as they are – appear to have done their job.

Still, high interest rates over time have a corrosive effect on business, particularly smaller businesses, and even when they do decline the rates won’t come down quickly.

To help weather the high interest rate environment, here are some strategies that businesses can implement immediately:

• Optimize working capital — Efficient management of accounts receivable, accounts payable and inventory can free up cash that can be used to pay down debt or reduce borrowing needs.
• Utilize credit lines wisely — Use revolving credit lines strategically for short-term financing needs. Pay them off as quickly as possible to minimize interest costs.
• Improve creditworthiness — Work on enhancing your company’s creditworthiness, which can lead to lower interest rates when borrowing. This includes maintaining a strong credit history and financial ratios.
• Cut unnecessary expenses — Reduce non-essential operating costs to free up funds that can be used to pay down debt.
• Implement efficient cash management — Properly manage cash flows to ensure that funds are available to meet debt obligations on time, avoiding any unnecessary late fees or penalties.
• Pay down debt faster — Allocate excess cash flow towards paying down high-interest debt more quickly. This can lead to interest savings over the life of the loan.
• Consolidate debt — If feasible, consolidate multiple high-interest loans into a single, lower-interest loan. This simplifies payments and can reduce overall interest costs.
• Refinance existing debt — If interest rates have decreased since you initially borrowed, consider refinancing your existing debt to lock in lower rates. This can lead to immediate interest savings.
• Negotiate with lenders — Reach out to your lenders and negotiate for better terms, especially if you have a strong payment history and relationship with them.
• Explore alternative financing — Consider equity financing, venture capital or angel investment as alternatives to debt financing. These options might help you avoid interest expenses altogether.
• Shop around for lenders — When seeking new financing, compare offers from different lenders to find the best terms and rates.
• Consider prepayment options — Check your loan agreements for any prepayment options that allow you to pay off debt early without penalties.
• Adjust loan terms — If feasible, negotiate longer loan terms to reduce monthly payments, which can provide more breathing room for the business.
• Consider variable-rate loans — Variable-rate loans might have lower initial rates, but they come with the risk of rates increasing in the future. Assess the potential risks and rewards before choosing this option.
• Monitor market conditions — Keep an eye on interest rate trends and market conditions to make informed decisions about borrowing and debt management.

If you have questions about how to protect your cash flow and profits from high interest rates, contact your G.T. Reilly advisor.