Monday, September 8, 2014

Rising Interest Rates and Your Business

The Federal Reserve has indicated that rates will be rising, albeit very slowly. What do rising interest rates mean for you?
 

Borrowing

The most obvious and immediate impact that rising rates have is an increased cost of borrowing. If you have a fixed-rate loan, you are not affected by any change in rates. But if you have a line of credit or other adjustable-rate loan, when banks raise their rates, it will cost you.

What will higher rates for borrowing mean to you? Will you ditch a new project that would have required financing? Will you raise your prices to cover the additional cost of your current debt service? These are the kinds of questions you should be asking yourself now.

Sales

As interest rates and borrowing costs rise, consumers may be personally affected (e.g., they’ll be paying more for new car loans, etc.), leaving them less to spend. This may adversely impact your sales. Be sensitive to this situation and carefully monitor your pricing.

Also consider your receivables policy. Depending on your billing process, you could be, essentially, acting as a banker for your customers. You may want to switch to a requirement of immediate payment (via credit card, PayPal, etc.) rather than agreeing to invoice them for the goods or services you provide.

Creating your own fund

If you anticipate a future need for money, plan ahead so you can lessen or eliminate the need to borrow. You can do this by retaining earnings rather than distributing them to owners.

If your business is a C corporation, there are limits on how much you can retain without incurring an accumulated earnings penalty. There’s a basic amount of $250,000 ($150,000 for personal service corporations) that can be accumulated with impunity. If you want to go higher, you’ll need a good business reason for doing so (e.g., a future expansion) — and you’ll have to document this reason in corporate minutes.

Conclusion

Work with your CPA and any other financial advisor to adjust to the business environment brought by rising interest rates.


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