Tips on preparing for changing consumer behavior and higher rates on your loans

The Federal Reserve raised interest rates seven times in 2022 to counteract inflation, and officials expect to keep rates higher through 2023. The prospect of rising rates may seem daunting for small business owners but the reality may be less worrisome.

Small businesses’ exposure to rising rates may be direct (for example, if you have a loan with a variable rate) or indirect (if your business is affected by changing purchase patterns as consumers react to increased rates). First, we’ll review the specific risks, then we’ll provide some tips for how you can prepare.

Understand the risks

Direct risk: Variable rate debt

Business owners with variable interest rates on loans or securities will be most affected by any rate increases.

Variable interest rates, also known as floating or adjustable rates, fluctuate over time based on economic conditions. Rate hikes could increase your interest payments on any loans, lines of credit (LOCs), or credit cards with variable rates, and thus the total you owe on these debts.

Indirect risk: Changing consumer spending

In addition, higher interest rates generally mean consumers cut back on spending, opting to save their money to receive higher rates of return. This behavior typically contributes to lower demand for goods and services. According to a September 2022 survey by the Federal Reserve Bank of New York, U.S. households plan to decrease spending over the next year.

Assess your exposure

Now is the time to determine which risk, if any, is most relevant to your business. Start by reviewing the fine print on your LOCs, business loans, and business credit cards to determine whether your rates are fixed or variable or ask your lenders directly via their customer service tools.

Action tip: While you’re at it, check the rates on your personal credit cards, too.

Likewise, assess whether your business is likely to be affected by changing consumer spending trends.

Prepare for rising rates

Tackle outstanding debt with variable rates.

Higher rates mean it will take longer to pay off debt. Pay off as much of your loans or LOCs as possible now, as rates are expected to continue to rise. If you can’t pay off all debt, try to renegotiate the terms to lock in today’s lower interest rates.

Action tip: Consider shifting your business and personal credit card balances to cards or loans with lower rates.

Shift cash-management strategies.

If you have extra cash on hand, consider moving it into CDs, money market accounts, savings accounts or other instruments that are low risk and benefit from rising rates. These vehicles will accumulate more interest when rates rise.

Assess your plans for financing growth.

Higher rates make it more expensive to borrow. As a result, it may be harder to access financing to expand or cover unexpected expenses. Consider seeking fixed-rate loans, such as those backed by the U.S. Small Business Administration (SBA) or another lender, which will protect you from future interest rate increases.

Plan ahead for changes in consumer spending.

If your industry is likely to be affected by cutbacks in consumer spending, consider bumping up your marketing efforts, such as targeting your most loyal customers and offering special promotions, to draw traffic.

Action tip: As you navigate a changing rate environment, it’s even more important than usual to manage your cash flow carefully.

Once you’ve taken these steps to prepare for higher interest rates, remember the potential silver linings. Rates are increasing to slow down inflation and stabilize the economy — both of which are likely to be good for your business in the long run. And while higher rates mean it costs more to borrow money, you’ll also receive higher payouts on interest-bearing assets.

Sources: CNN, Federal Reserve Bank of New York, The Philadelphia Inquirer.