Borrowing cash for your small business is quite challenging, especially from traditional sources. Here’s how you can manage it. You’ve definitely heard that loan interest rates are rising, but have you asked yourself whether it will affect your current commercial loan or line of credit?
The answer is yes – and it will make commercial loans difficult to acquire in the future. Banks and other lenders base their rates on what it costs them to acquire the cash they lend out. Most of the lenders openly borrow that cash from other banks, and that they carry out based on the federal funds rate. Although the Federal Reserve has in recent times left this rate unchanged to zero, many assume that it will start going on within the near future, pushing the prime rate to ultimately increase.
The overall conclusion here is that all companies that lend or borrow are subject to interest rate risk. The general risk to each company can be affected by a number of factors:
1. Loan Term Duration
One of the most important causes of the interest rate risk a business is uncovered to, is the commercial loan terms on its borrowings. As the short-term borrowing rate increases, the company may find its end result affected if it has to refinance its bank debt without being able to pass this increased rate directly to its customers.
2. Credit Risk
A business’ credit risk is determined by way of its debt-to-equity ratio. As the interest rate rise, the equity falls because the business is paying out more interest. This will increase the overall credit risk of the business, which, in turn, causes lenders to raise the interest rate on new borrowing. The more debt exposure a business has, the higher its usual interest rate is.
In case you have a variable rate line of credit or loan, you can presume your interest rate to rise in the near future. And on the other hand, if you have a fixed rate loan, then your traditional lender may try to have you renew your loan at higher interest rates.
Getting a commercial loan become more difficult in some cases. Commercial loans are funded based on a borrower’s ability to make loan payments. However if the interest rates will increase, it means that the total payments will increase, making it much difficult for a small business to make the grade.
3. Offset the Challenges
Here I am going to clear some things that you can perform to offset these challenges:
In case your commercial loan is asset based, make certain that the worth of those assets are up-to-date. If your business line of credit is based on receivables, you need to make certain that the receivables are collected as per the line of credit terms.
And if your commercial loan is based on inventory, then you need to make sure that as the prices drop, you take the appropriate inventory devaluation or in case the prices increase, then you can prove the increased value of your inventory.
And most importantly; despite the fact that the bank has allowed leniency for a small contract violation, make sure that you’re in the contract.