As a business owner in Canada, it’s important to keep a close eye on the country’s economy to prepare for changing trends. While there are many things worth keeping track of, one of the most important developments in recent years is rising interest rates.
In early June 2023, The Bank of Canada raised its benchmark interest rate to 4.75%. This marked the first time Canada’s central bank raised its interest rate since January 2023, continuing a post-pandemic upward trend.
Interest rates and inflation are inseparable—the banks raise the former to reduce spending and reduce the latter. Unfortunately, as we’ve come to see, interest rates and unemployment also go hand-in-hand as companies struggle to manage them.
As it continues to become more expensive to borrow money, Canadian businesses are at risk of finding themselves in greater debt. Fortunately, there are several ways you can protect yourself from the disadvantages of interest rates spiking.
Spikes mean servicing existing debt is more expensive. Therefore, if your business has any outstanding loans with variable rates, now would be an excellent time to consider refinancing to a fixed rate. Doing so will allow you to lock in your costs and prevent increases to your monthly payments.
Shop around for the best refinancing deals and negotiate terms with lenders. Every fraction of a percentage point saved can make a significant difference to your bottom line.
One of the effects of high interest rates on businesses is that costs of borrowing go up while economic growth slows down. This creates a lose-lose situation where the cost of doing business goes up as you do less business in general.
To protect your company, it's crucial to optimize cashflow. Focus on improving your accounts receivable by speeding up collections, offering incentives for early payments, and promptly following up on overdue accounts. Also be sure to evaluate your inventory management practices so valuable capital is not tied up in unsold goods.
It may be necessary to revisit your pricing strategy. While increasing costs for consumers is not always desirable, a careful analysis of your price elasticity, competition, and market conditions may reveal room for a fair increase.
Any adjustment should be done strategically with consideration for how the market will respond. This might also be an opportune time to diversify your product or service offerings to generate additional revenue streams.
An effective strategy to manage the risks is to invest in interest rate hedging instruments. These include interest rate swaps, futures, and options, all of which can provide protection against rate increases.
These tools allow you to manage your interest rate exposure and mitigate the risks to your cashflow and profit margins. Speak to a financial advisor to explore these options as they require a good understanding of financial markets.
It's vital to revise your business plan and financial forecasts. This means reassessing your sales projections, costs, and cashflow—contingency planning is essential.
Think about how your business might be affected and what measures can be taken to protect your interests. This might include finding more cost-effective suppliers, reducing overhead expenses, or finding new ways to increase sales volume to offset higher costs.
Invoice factoring is a financial strategy that can be particularly effective in combating the challenges posed by rising interest rates.
It is a process where a business sells its accounts receivable—a.k.a invoices—to a third-party company known as a factor. The factor then pays a percentage of the invoice upfront (typically 70-90%) to provide the business with immediate access to working capital.
The good news is that the benefits of invoice factoring run deep.
It immediately boosts cashflow. Unlike traditional loans that can take weeks or months to get approved, factoring can provide funds in as little as 24 to 48 hours. This is especially beneficial in a high-interest environment where acquiring new debt is costly.
Even better is that because invoice factoring is not a loan, it does not add to your company's debt load or impact your credit rating. Reducing reliance on debt financing will greatly protect your business from elevated borrowing costs.
Invoice factoring can also offer protection against bad debt. Depending on the agreement, some factors assume the risk of non-payment, shielding your business from the impacts of unpaid invoices. This can be a significant advantage.
Being linked to sales, invoice factoring can scale with your business. You can secure more financing as you generate more invoices. This can be advantageous for growing businesses, providing them flexibility to manage resources as sales volumes change.
Rather than having to ask “when is the next interest rate hike?” in fear, put these effective strategies in action and feel prepared. You can combat interest rates rising with careful financial management, strategic pricing, and wise use of financial instruments.
Continuous adaptation and flexibility in your business planning will ensure your enterprise stays resilient in the face of changing economic circumstances. If you’re wondering how to profit from rising interest rates, then focus on staying proactive and making informed decisions as these are key to navigating these complex financial landscapes.