Invoice Bazaar Blog

What should businesses do if interest rates are expected to rise?

By Invoice Bazaar | November 13, 2022

Any rise in interest rates will adversely affect the borrowing power of business enterprises and constrict the inflow of cash from sales revenue, as rising interest rates also lead to a drop in the purchasing power of clients and prospects. The net result is a profound drop in cash inflow affecting every aspect of business operations.

On the finance front, businesses must immediately put their houses in order. They should take stock of the situation, evaluate their balance sheets and determine how much they can bear the financing costs of existing debts. 

Resources may have to be channeled away from research and development, and businesses will have to hold out and weather the storm until the economy begins to recover and everything starts stabilizing.

Furthermore, companies should strive to estimate or foresee the extent of the rise in interest rates possible and accordingly convert all flexible-rate loans to fixed rates. Sometimes, taking small top-up loans to consolidate earlier loans and turn them into fixed-rate loans may work. 

Meanwhile, as a business owner, you need to seriously assess which essential business operations can be hurt the most by the impending rise in interest rates and make necessary arrangements so that the business organization doesn’t suffer beyond tolerable levels.

You must immediately analyze or audit consumer spending patterns and company cash flows. You may have to postpone investment and expansion plans and put your growth on hold. Every decision to cut profit margins to absorb the effects of rising interest rates has to be carefully thought out because paring back profit margins can have serious repercussions at a later stage. 

However, it is not prudent to panic and mindlessly slash wages or delay payments of outstanding bills for one and all. Small businesses can’t afford to lose trusted suppliers or skilled workers overnight. They need to make very balanced and farsighted decisions and make inevitable trade-offs to survive by considering both short-term and long-term perspectives.

Meanwhile, a recessive market may bring multiple opportunities to MSMEs. For instance, the latter can pick up specialist talent laid off by big businesses and also cut better deals with suppliers. They can use the slide in demand to shape supply-side operations and build credibility. And most of all, if they are well prepared for a rise in interest rates, they can avail openings left by other businesses that fail to manage their finances effectively.