For business owners, 2018 has been a year marked by change. Though much of that change is linked to the 2017 Tax Cuts and Jobs Act, the government, specifically the Federal Reserve, just handed down some more changes, and according to financial experts, they may not be as beneficial. By the close of September, the Federal Reserve hiked interest rates for the third time this year, and economists anticipate that it won’t be the last time this year.
The impact of these interest hikes can vary, and though some effects will be positive – higher savings returns, a stronger dollar (theoretically) – for small business owners, often precluded from the aftermath, the continued hikes can serve as a hindrance, at least according to some experts.
In a recent AP article outlining this very issue, Nalanda Matia of Dun & Bradstreet speculated that the rising interest rates could have the potential to affect everyone, even those who traditionally think their business is protected from such activity. Though the true impact of these increases is yet to be determined, Matia points to a slight increase in credit-card delinquencies (2.3 percent to 2.7 percent) and credit utilization (22.8 percent to 24.5 percent) as potential indicators of problems to come. In addition to these changes, the senior director in the econometrics practice also calls attention to the average credit card interest rate, which, at 14.14 in the second quarter, has exceeded an eight-year record.
Alone, those increases may seem insignificant, but when paired with Federal Reserve interest rate trends, they can begin to paint a dark picture. Increased delinquencies can hint at trending cash flow problems among small business owners, and as cash flow becomes problematic, many small businesses must turn to credit cards and other interest-based borrowing opportunities. In turn, credit utilization becomes higher, and as interest rates increase, the cost to do (or maintain) business rises, putting small business owners at a potentially dangerous disadvantage.
What can you do to help stave off some of the negative effects of the rising interest rate?
Make cash-flow management a priority
In the aforementioned AP article, Matia advises small business owners to work with supplier and customers in an effort to reach a cash flow equilibrium. Suppliers may accept payments later while customers may be willing to pay sooner. The goal, of course, is to decrease your need to finance the gaps between incoming and outgoing payments.
Monitor your credit
A good credit score can unlock the best rates, and so monitoring your credit should be part of your regular routine. But, as interest rates rise, you’ll want to renew this effort. Your credit report speaks volumes about your financial health and monitoring it can help you determine what accounts or activities you’ll need to prioritize in your effort to maintain your credit score. Further, reporting mistakes do happen, and now is not the time to be burdened by errors that aren’t yours.
Make sure that you’re checking your credit report, not simply your score, as your score will only provide a top-level look into your credit portfolio; your full report will help you build a strategy. You can see your reports for free with Nav.
Carry low balances
Credit card reporting agencies use a variety of factors to determine your score, but your credit utilization often takes a lead role. Ideally, you could pay off your balances, which can help maintain your credit score and decrease the amount of interest you pay over time. However, that’s not always possible.
Opening a new credit account can help lower your overall credit utilization ratio, but creditors and lenders will still look at individual credit lines and their utilization rates. One option is to simply ask your creditor to raise your credit limit. If you’ve paid on time and have a great track record with them, they may grant your request. Another option would be a balance-transfer card, which can help you lower each individual lines’ utilization.
Pay your bills on time (or early): Obvious, I know. Paying your bills on time may seem like a line from Money Management 101, but the importance of this activity can’t go unnoted. Every time you pay a bill on time you send a message to the credit reporting agencies as well as potential lenders that you are a responsible business owner who actively and regularly pays down their debt. Every other effort you put into building or maintaining a good credit score will become null and void if you repeatedly neglect your monthly, quarterly, or yearly debt obligations.
How will rate increases impact your business? For many, only time will tell; however, experts are suggesting that small business owners take heed of the warnings and plan for potential repercussions. One of the best ways to do that is to implement habits that will improve the health of your everyday finances as well as your credit portfolio. Smoothing your cash flow, staying on top of your bills, and taking the steps necessary to improve or maintain your credit score may go a long way in helping you avoid the potential problems associated with increasing interest rates.
This article was originally written on October 10, 2018 and updated on October 11, 2018.