Author Bryan Frandrup is Chief Lending Officer at BankCherokee in St. Paul. Contact Bryan at bfrandrup@bankcherokee.com or 651-291-6208 with any questions or comments.
We are currently experiencing a rapidly changing interest rate environment. With the recent Fed rate changes, this marks the fastest pace of rate hikes since the 1980s. Higher interest rates mean higher interest costs to your small business. As the owner, this requires you to take action to protect your business and save you money. Here are our recommended top eight steps you can take to ensure you are not making any costly mistakes when it comes to your borrowings.
- Review your existing rates and terms. Maybe you can rattle your loan rates off the top of your head. If you are like most people, however, it is out of sight, out of mind. You may only really pay attention at the time of origination when you are engaged in the process. Do a quick review–determine what your current rates are, whether they are fixed or variable, when the loans mature, and whether there are any prepayment penalties to consider. Taking a 10,000-foot view, you can assess what the impacts may be on your interest costs and, consequently, your business.
- Have a conversation with your Banker. Hopefully, you have a solid working relationship with your Banker. Your Banker should be a trusted advisor who has a thorough understanding of your existing loans, your business, as well as your industry. Your Banker can help you understand your options and make recommendations based on your business and needs. This is where your Banker should earn their keep. If your Banker is not having these discussions with you, there are experienced small business bankers out there who can help.
- Develop a plan for any anticipated future borrowings. You have a business to run, and that means trying to grow your business while maintaining your equipment and infrastructure. This may require you to purchase new equipment to grow or replace existing. Determine your capital expenditures for the year. Then have another conversation with your Banker. If you know what your needs are, you may be able to lock in interest rates now for future purchases later in the year.
- Stress test your business. If rates continue to rise, what will be the impact to your business? Will you be able to continue to afford the payment obligations on your debt? Run different scenarios with various assumptions. What if rates go up 1%, 2%, 3% more? What if revenues fall, or expenses unexpectantly rise? Be prepared to make some tough decisions to ensure your business can continue to cash flow in the face of a rapidly changing economy. Also, having current financial information is key so you can react quickly and make sound decisions that may result in significant savings.
- Do not be discouraged. Even though rates are rising, rates are still historically low. If there are opportunities to grow and gain market share, do not let rising interest rates deter you from your long-term company growth goals. Just like anything else, rates go in cycles, as do business opportunities, so be sure to strike if the iron is hot!
- Do not wait. If you were contemplating new borrowings, act now. All indications are that rates will continue to rise through the end of the year. The good thing is, banks still have considerable liquidity, which means they are looking for ways to lend it out. This works to your favor. It is a competitive marketplace, and banks compete for business just like anyone else. So be sure the rate your bank is offering is competitive in the market.
- Lock in variable rate loans. Seems obvious, right? But you did not know locking rates was an option. Community Banks who work with small business owners are known to be creative and flexible in providing financing solutions. If rates continue to rise, as they are expected, you would be well served to lock in a fixed rate. It may not be feasible, but it never hurts to ask!
- Create a plan to pay off any high interest debt. Always make sure you are minimizing your interest costs by paying off high interest debt first. If you have any high interest debt, can you focus on paying that debt down quickly or see if there is a way to convert that debt to a lower rate through collateralization or some other option? Your Banker may have some good ideas for you there, too; give them a call!!