Changing Interest Rates Squeeze Cash Flow
Unless you’ve been completely avoiding the news, it’s no surprise that inflation is the number one topic that is on everyone’s mind. We’ve been lamenting gas prices for months, eggs are close to five dollars a dozen at the grocery store and the used car market has seen new highs. The price of everything from shoes to houses has risen over the past couple of years. As a business owner, no doubt you’ve seen prices increase too. But what about the cost of money - what has that done to your cash flow?
In 2022 we saw a dramatic increase in interest rates and it has had an effect across the board. Any loan - from a 30 year mortgage to a five year equipment loan to a one-year operating line of credit - they all have been proportionately impacted by this rising cost of capital. For example, if you have a $1 million line of credit and your rate was previously 3% you would have paid $30,000 for that loan over the course of the year. Now that same loan would be at least 7.25%, if not more, which would cost at least $72,500 a year. To add insult to injury that same $1 million doesn’t get you nearly as far when it comes to paying for supplies, payroll, and other goods and services. With low cost government funding, such as PPP loans and EIDL loans no longer available, many companies are finding themselves in a cash crisis.
How can you help to combat the rising cost of capital for your business? It’s always important in changing times to consider different methods of financing that you may not have previously considered. Choosing a lender simply on rate may not be the best bet in these current times. The difference in rates between lenders may not be as much as you think! Factoring and Asset Based Lines of Credit do not always fluctuate in price the same way fixed term loans might. For growing companies or businesses trying to make it through challenging times, short term, cash flow financing might be a great stopgap to get back on track with your cash needs and create a new, profitable game plan going into 2023.
While the cost of capital may always be important, a relationship, a creative approach to your business, and the ability to withstand ups and downs are all also important. These must be taken into account when considering a lender. While price is a consideration take time to understand what this price is getting you and whether or not it can actually help your business make progress.
