Rate hikes have been all over the news lately, but what does it mean for your small business? The increase from 0.5 to 0.75 percent was picked by the Federal Reserve with the country’s economic growth rate and inflation rates in mind. They’ve only adjusted the rates once since 2008, so this move is getting a lot of attention. What’s more, there’s a good chance these rates could go up even further in June.
Between 2017 and 2019, IHS Market predicts that the interest rate will increase until it gets to 3 percent. You need to prepare your company today for the financial landscape of tomorrow and learn the answer to the question: How do rates affect businesses?
The Benefits of a Federal Rate Hike for Small Businesses
Securing a small business loan can be difficult when the federal rate is low. Banks don’t get as much back in interest when companies borrow money from them, so they tighten up their requirements and focus on other products in their portfolios. Once the rate increases, financial institutions are more motivated to lend money. If you were denied for a small business loan before the increase, your chances might be better now.
Not only this, but rate hikes can actually be a catalyst for improvements in your own business. Seeing that rates are likely to rise, many small business owners are quickly securing financing on projects for growth. Doing this sooner than later creates an opportunity to grab a lower interest rate. So if you struggle with dragging your feet, a rate hike can give you the courage to act now instead of later.
The Disadvantages of a Federal Rate Hike for Small Businesses
Unfortunately, the federal rate hike also throws some disadvantages your way. The biggest problem concerns any fund that you’re currently borrowing from. You may have to pay more due to the rising interest rates, which can make a dent in your cash flow.
While this applies to a wide variety of financing options, whether that’s a credit card, a mortgage or a small business loan, you can expect that higher rates will mean you pay more in interest over the years.
The Next Steps
The next few years may see rate increases, and you need to move quickly if you want to secure a small business loan before you lose the benefit of lower rates. By taking action now, you put your company in a stronger position for the long term.
You need to make yourself as attractive to lenders as possible. If you have experience with consumer credit, many of the same principles apply for business loans. The financial institutions look over your information to determine whether they feel that you can pay the money back based on the terms set in the contract.
Some of the factors they look at include your current lines of credit, the total amount you’re borrowing, the types of credit accounts you have, your payment history, public records, the age of your business and utilization. Your business credit report probably won’t have as many accounts listed as you actually use. This situation occurs because your creditor may not report the trade line to a credit bureau.
When you’re starting out with limited small business credit, you may need to offer a personal guarantee on the application. Your personal credit gets pulled into the equation as the basis for whether the lender judges you creditworthy or not. A strong consumer credit score can act as the jumping-off point for your small business report. Look for the relatively easy trade lines to get as a small business, such as credit with an existing supplier or vendor. You already have a preexisting relationship and a strong payment history, so they’ll be more likely to extend you some credit.
Do whatever it takes to pay these accounts on time, as lenders look closely at your payment history during the underwriting process. Reach out to places that you use as a consumer, such as your bank or credit card company. They often have business products that may be easier to get since you already have financial services through their organization.
Be prepared to go over your business plan, financial documents and other information that shows the lender that you’re a growing and thriving business. The more times you prove that you have an established plan and a proven market, the more likely they are to want to capitalize on the growth potential. At the end of the day, the lender wants to make money on your line of credit, not lose out on their investment. The steps you take to shore up your business and personal credit can go a long way towards getting you a small business loan before the interest rates go up again.
The next few years require your careful attention. You’ll need to make adjustments to your business budget if you have variable rate loans, and you face higher future interest costs for any new line of credit you take out. Act quickly to put yourself in a position to get a small business loan that’s tied to the 0.75 percent rate, rather than the possible 3 percent of the future.