Small-business tips for surviving a high-interest environment

 In Economic Trends, Finance Highlight

The interest rate increases that began in March 2022 have proven surprisingly enduring, with many policy-makers and pundits now referring to a “higher for longer” rate environment. For younger generations, it’s unlike anything they’ve ever experienced before. For business people who lived through the rate hikes of the early 2000s, it’s still a shock. 

While business owners can’t control whether rates go up or down, there are things they can do to protect the business from the negative impact of high rates. In this blog post, AR Funding CEO Brian Holden shares his best tips. 

Control costs

Every dollar the business can save is a dollar it can put toward its debt, and when the cost of borrowing is so punishing, it’s worth seeing whether there are any areas where you can trim excess spending. Staying away from credit card debt tops the list, but there may be other ways to claw back more cash.

Holden suggests taking advantage of early-payment discounts when they are more favorable than the interest you would earn by holding on to it. For businesses that maintain an inventory, he recommends fine-tuning the timing to minimize overstock and reduce the amount of time inventory spends on the shelf.  

Know your customers

Getting to know your customers through sound credit management practices is something Holden recommends in any market, whether it’s a high-interest or low-interest environment.

“The sale is not complete until you get paid, so you need to do everything you can to make sure that happens,” he explained. “In this market, we’re going to see more bankruptcies as companies struggle to remain profitable at a time when the cost of doing business is higher than it’s ever been.” 

For specific tips on how to evaluate the credit-worthiness of your customers and avoid the risk of nonpayment, read this article on credit management.

Prioritize collections

With the cost of borrowing going up, businesses are holding onto their cash as long as possible, which means extending payment terms wherever possible.  

“Larger companies seem to be managing their interest costs, which have often doubled, by doubling the length of time it takes them to pay their vendors,” said Holden. “We have seen payment terms go from net 45 to net 90 in the past year, along with more 120-day terms, and even 150 days.” 

Unfortunately, there’s not much small businesses can do to change payment terms without risking the loss of a customer. However, you can prevent delays by staying on top of collections and paying attention to the paperwork. 

“Make sure your invoice backs up the receivable so customers don’t have a loophole to slip through,” Holden said. “All it takes is for the bill of lading to be missing, and it gives the customer a reason to delay payment beyond the agreed-to terms.” 

Read this article for more tips on reducing payment delays.

Know your bank

Small and mid-sized companies aren’t the only ones getting squeezed by this high-interest environment. The situation is impacting small and mid-sized banks as well. 

Specifically, the collapse of the commercial real estate market is starting to put pressure on banks that have significant exposure to this business segment. 

While FDIC insurance helps to protect business deposits, Holden warns that new limits on the protected amounts were recently imposed, so it’s worth checking those limits and understanding how they could affect you. 

He also recommends doing more due diligence on the banks that hold your assets. 

“Businesses should make efforts to know their bank, just like bankers make efforts to know their customers,” Holden said. “Follow the news in the media. Keep an ear out, and if you hear anything, act on it.”

For more tips on protecting your deposits, read How to protect your business during a banking crisis.

Adjust your contracts

This tip may not help you in the immediate future, but over the longer term, it’s worth adjusting your standard contracts to allow the inherent cost of interest to be passed on to the customer in cases where payment is late. Given the duration of the current high-interest situation, this could end up saving your business a fair amount of money.

“Business owners can’t control the economy,” Holden said. “But they can take steps to insulate themselves. It starts with paying more attention to your cash flow and the financial health of the people you do business with, including customers, vendors, and banks.”

If your business is impacted by high interest rates and you would like to learn more about how invoice factoring can help you accelerate cash flow, talk to an AR Funding expert in your region. 

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