Interest Rates in Canada continue to increase.

How rising rates impact your SMB

Since March of 2020, borrowing rates in Canada have been historically low and low-cost money has been flowing into small businesses. With record-high inflation knocking at our door, the Bank of Canada announced a series of incremental rate hikes to wrestle inflation under control. Rates will likely continue to climb even further as inflation remains rampant and we might not see the effects until 2023. The current inflationary and higher interest rate environment that we find ourselves in today is an un-welcomed challenge for small business owners, who have already faced dire circumstances during the pandemic. If your small business is relatively new, you may have never experienced a high interest rate environment before. As such, what can you do to manage the impact of rising rates and what can you expect moving forward?

Let’s get you up to Speed

In March of 2020, Canada’s key interest rate was lowered to 0.25% and remained the same for the following two years. During this time, Canadians borrowed money for practically nothing, which resulted in increased spending in various industries. The Bank of Canada started hinting changes to its monetary policy in 2022, making higher rates a reality and inevitable. As expected, on March 2, 2022, the Bank of Canada raised its key interest rate by 25 basis points to 0.5%. This was swiftly followed by an additional rate hike on April 13th, by 50 basis points, bringing the key interest rate to 1%. Banks and financial advisors are now predicting Canada’s key interest rate to go up another half-percentage point in June to help mitigate the effects of inflation, and eventually to reach a rate of 2% by the end of 2022. Now that you’re all caught up, let’s talk strategy to help you navigate rising rates as a small business owner.

Strategies to Manage Rising Rates

1. Lock in Fixed Rate Financing

As rates continue to increase in 2022, the cost of borrowing for small businesses will continue to drive up over time. Coupled with persisting supply chain issues and inflation still at large, small businesses will also face rising cost for supplies. As a result, SMB owners will require stable and ongoing financing to support their small business moving forward. If you need to borrow money – secure financing now. Whether you’re looking to expand your business or stock up on inventory, get financing quickly and at a fixed rate. Although rates may be a little higher now than a year ago, you will protect yourself from future increases.

When it comes to small business loans, you have a variety of options to choose from. While banks may be a great financing option for some, it may not be for others. With rising rates, banks become more selective, making it harder for SMBs to qualify for a loan. Alternative lending can be a better solution for some small businesses and may offer you additional flexibility in terms of meeting specific needs such as a streamlined application process, faster access to funds, a variety of funding options and higher approval rates. If you’re looking to weigh in your options, Journey Capital financing may be just what you’re looking for. Click here to see how much you may qualify for.

 2. Know Your Business

Knowing your business inside and out is key to dealing with new economic scenarios and stresses, such as the inflationary and higher interest rate environment we’re currently dealing with right now. One way of being proactive is asking yourself the following questions:

  • How much debt does your business have outstanding?
  • How’s your current cashflow?
  • If rates continue to rise as predicted, will you be able to cover your credit & loan obligations?
  • What if supply costs continue to rise?

To Know thyself is the beginning of wisdom – Socrates

It’s important to tackle these questions and to run through ‘’what if’’ scenarios to see if your business can weather the storm. It’s impossible to run through all scenarios, but make sure you cover the ones which could impact your business the most. Pressure test your business operations now to ensure you can withstand a potentially slower economic period in the future.

3. Cut Down on Costs

In addition to rising interest rates, many economists suggest that Canada is heading towards a recession anywhere between 2023 and the first part of 2024. As if small businesses needed another challenge. That said, rising rates and recessions can be dealt with in a similar fashion, i.e., cutting cost where you can. This is a common strategy when facing hard economic times and can be used in many ways. It can unfortunately mean laying off employees or reducing wages. It can mean reconsidering contracts with suppliers and seeking business elsewhere. It can also simply mean looking at your subscriptions or anything that you pay on a contractual basis, such as unnecessary services, features, or services. You get the gist – cut out anything that is non-essential to your business’s future success. Additionally, you should pay down any high-interest debt that you have outstanding. Although credit-card interest rates are unlikely to be impacted by rate hikes, with these already set at 19.99% on average, you should pay your balance in full every month to avoid excessive interest. As awful as cutting staff, wages, or products may seem, don’t forget that rising rates are temporary. You should think 3 or 5 years ahead, once issues stemming from rates have cooled.

A Welcome Change

Rising rates in 2022 may be initially challenging to confront for some small business owners, but down the line it will likely bring welcomed changes to the Canadian economy. Inflation will hopefully settle and reach its 2% target by the end of 2022, which will in return reduce other costs for small business owners. With more balanced economic conditions, and modest price relief for buyers, things will slowly trend back to normal, and you will be able to focus on building a successful business for the future. As rates continue to rise, time is of the essence. If you require financing in the near term – it pays to act now.