Retaining "Bankability" in a High Interest Rate Environment

Solomon Ponniah, Director, Business Banking, Popular Bank

Solomon Ponniah, Director, Business Banking, Popular Bank

In a higher interest rate environment and a likelihood of a slowing economy, how do you keep your business financially healthy? As lending guidelines tighten, many small business owners are faced with a challenge of maintaining good credit practices and a strong financial statement.

According to a recent U.S. Chamber of Commerce Small Business Index, concerns over inflation have reached a new high as more business owners brace for an uncertain future. The survey found that 71percentof small business owners anticipate that when it comes to inflation, the worst is yet to come.

“With higher interest rates, the cost of funds increases as well, and small business owners find themselves having to manage expectations and be lendable.”

With higher interest rates, the cost of funds increases as well, and small business owners find themselves having to manage expectations and be lendable. Making sure your company income and your balance sheet are both in good health will help businesses remain bankable, even in a more challenging economic environment. Keep the following tips in mind as you assess your situation:

Key Area #1 - Stabilize Income

1. Reevaluate the budget – the past and at the forecasted. Examine what budget was in place at the start of 2022 and what was planned for 2023. Have the expenses been properly evaluated given a higher interest rate environment? If not, it is time to rethink the company’s operational expense strategy. The same applies to budget forecasting. Current economic conditions should be reflected in your forecasted amounts. We are seeing a lot of businesses that went thought a rapid pandemic-related expansion, did not align their projections to the changing market conditions, and are facing challenging decisions having to cut spending today.

2. Analyze capital requirements. Determine how much is needed to acquire additional capital, given the higher borrowing costs in today’s market. The Fed is expected to continue raising rates in 2023. Be practical about the capital that your business needs and make sure to take the interest rates into account.

3. Stabilize the bottom line. Pay close attention to operational expenses. Does the company need to streamline staff, cut back on promotional activities, or invest in other areas to achieve profit and stabilize the bottom-line? Banks look at the top-line, the middle and the bottom-line to ensure the business is financially healthy and is a good candidate for lending. So, make sure all three are solid.

Key Area #2 - Protect the Balance Sheet.

Whether your business is seeking capital or not, protecting the balance sheet is crucial to your financial viability. Consider the following options.

1. Diversify. Businesses need to diversify in all areas, including suppliers, clients, geographic footprint, exportation, or importation. Diversifying allows you to manage risk better, lessening dependency and potential business interruption.

2. Prioritize innovation. Take proactive steps to stay competitive, discover new ways to generate revenue or improve efficiency. Your competition is already doing it, so make innovation a business imperative in today’s evolving landscape.

3. Mind the balance sheet leverage. Taking on more debt than required or diluting your business equity through distributions and dividends or other investments can impact your business growth. Financial institutions pay attention to how leveraged your entity is, and securing additional credit can be challenging, especially a rising interest rate environment. 

Reviewing these areas can help determine if staying the same, investing in certain areas, hiring, downsizing, changing your pricing structure or vendor relationships is the right move for you. Being proactive will keep your business prepared and financially healthy as the market shifts and will keep it “bankable” for capital needs and sustainable growth.

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