Business loans and lines of credit are often necessary to maintain operations, while also increasing working capital for small businesses that are just starting up. However, interest rates are rising rapidly at the moment, making growth incredibly difficult for business owners. Generally, interest rates rise to combat inflation, as it discourages people from borrowing more money. Thus, reducing expansion and promoting saving rather than spending.
How SMEs Are Affected by Higher Rates
Small and medium-sized businesses (SMEs) typically rely on loans and business financing. This is especially so in the initial stages of operations when there is growth. Going into debt is a common practice for any business. But with interest rates rising, it is becoming more difficult to pay back a business loan since the interest component of the instalment is higher.
Difficulty paying back loans often means businesses must find alternative funding options, including taking on additional debt. The cycle of debt is only worsened by rising interest rates and leaves many SMEs unable to sustain their businesses while repaying the loans.
10 Tips to Tackle Rising Interest Rates
- Work with a financial partner who will help you navigate difficult financial decisions and help create a plan that works best for your business.
- Revisit your business plan. Look into your short-term and long-term solutions to tackle your debt. Track sales and expenses diligently to better understand the cost history of your business.
- Finance now rather than later. If you need business financing, act before interest rates rise further. This can potentially save you from higher interest payments.
- Avoid taking out unnecessary business financing. Taking out loans to cover debt may be tempting but this will only worsen if interest rates continue to rise, and you can’t keep up with payments.
- Convert your variable interest rates to fixed rates, as a fixed rate is a stable and safer option in the long term.
- Look into alternative financing platforms, such as crowdfunding or an online private lender, that allows for more flexibility than traditional banks.
- Selling company equity is not an ideal solution, but it is a quick way to raise capital during financial stress.
- Implement invoice financing, which is a way for your business to borrow money against amounts due from your customers.
- Reduce your fixed costs and research on temporary solutions or better deals within the market. There is always a better deal!
- Offer incentives to motivate staff to create new cost-saving methods within the company. Implementing expense saving alternatives is an excellent opportunity for your staff to find solutions and get creative.
How Private Lenders Could be Useful to Businesses in this Interest Rates Environment
Private lenders offer more flexible loan terms and less paperwork than a traditional bank. Businesses are not limited by a low credit score, and private lenders are more likely to approve a loan quickly. Poss Capital offers you access to Quik with fast, flexible loans with your choice of tenure and no early repayment fees so your business can grow faster.
SMEs will always feel a direct impact regarding changes in business financing, market rates and inflation. With interest rates still on the rise, you should consider different money saving methods for your business. For more information and assistance navigating rising interest rates, speak to us for advice on our business financing solutions.