What do higher interest rates mean for a small growing business?

The Federal Reserve increased interest rates last month and is expected to continue to increase them in 2017.  What does this mean for small business? There is usually a delay before banks increase rates on their products but they eventually will get there.  Once they do, borrowing costs related to loan products and lines of credit will increase for the small business owner.

Small businesses should NEVER borrow funds to meet daily operating expenses.  The two acceptable reasons to borrow are, as follows:

  • To purchase capital assets such as equipment and machinery and/or to purchase/lease real estate as these investments will drive future cash flows used to repay the borrowings

  • For short-term needs to fund accounts receivables and inventory assets; these assets will also provide cash flow in the near future to repay the borrowings

Debt financing should be limited particularly in a rising interest rate environment.  Small business owners are better served by being prudent with their limited resources and focusing on ways to self-fund their businesses as much as possible.  Here are some tips to help with successfully self-funding your business:

BE STRATEGIC – Taking the time to develop business strategies that are aligned with market conditions and have a focus on efficiency will help you get there!

REENGINEER PROCESSES – Often times, small business owners are so stretched that they feel the constant need to hire new employees.  While some hires are needed, take the time to evaluate if there is a better way to get things done.  Consider outsourcing functions to experienced vendors.  Often investments in technology can increase efficiency and save on labor costs.

OFFER INCENTIVE COMPENSATION – For those you do hire, have them share in the incentive to grow the business by compensating them with a lower base salary coupled with a bonus/profit sharing structure based on performance.  In this way, you are only expending additional funds on compensation if the business is successful in achieving its financial goals.

Follow these tips, and you will have a PROSPEROUS 2017!