Kenny Natiss heads The LCO Group, a NYC-based IT solutions company serving a broad range of industries. In the following article, Kenny Natiss discusses the best financial moves for small businesses after the recent federal interest rate hikes.
Unlike multinational conglomerates, small businesses often struggle to weather sudden shifts in the economy. Without substantial cash reserves, they face an uphill battle against steep interest rates and rising inflation. However, by taking care to cut back on unnecessary expenditures to cover variable rate loans and pressure checking their finances, small businesses can come out of financial downturns even stronger explains Kenny Natiss.
Although rising interest rates will likely cut into consumer demand, successful small businesses can shore up their interests by making a few smart financial moves. Kenny Natiss explores what options are available to small business owners and discusses how the Federal Reserve's recent decision to raise interest rates will affect business.
How Rising Interest Rates Will Affect Small Businesses
Unfortunately, interest rates affect small businesses in a number of ways. The most direct way is through the cost of borrowing money, as higher interest rates increase the cost of taking out loans. This can make it more difficult for small businesses to expand or invest in new projects explains Kenny Natiss.
In addition, higher interest rates can lead to higher costs for small businesses that have variable-rate loans, such as lines of credit. If the rates suddenly increase on a pre-existing loan, a small business owner will have to pay a higher percentage every month just to meet their minimum payment. This can greatly cut into revenue and hurt small business owners' bottom lines says Kenny Natiss.
Last but not least, higher interest rates can lead to lower consumer demand, as consumers have less money to spend in general. This has a direct effect on small businesses, explains Kenny Natiss which are often seen as a luxury compared to the price stability found at larger multi-national corporations, such as Walmart or Costco.
How Small Business Owners Can Prepare for the Coming Financial Storm
Fortunately, there are a number of ways that small business owners can weather the storm and come out on the other side relatively unscathed. First and foremost, small business owners need to be aware of how higher interest rates will affect their business specifically. They should take a close look at their variable-rate loans and see if there is a way to lock in a fixed interest rate explains Kenny Natiss.
This will help to protect them from any sudden increases in the cost of borrowing. In addition, small business owners need to be mindful of their spending. Just because interest rates are rising does not mean that they should immediately start cutting back on expenses. However, they should take a close look at their budget and see where they can save money.
For example, they might consider cutting back on unnecessary inventory or discontinuing product lines that don't sell as well. By focusing on the stronger aspects of their business and reinforcing those areas, they can stave off the damage of a slow financial bleed explains Kenny Natiss.
Last but not least, small business owners need to have a plan for if and when consumer demand decreases. Kenny Natiss says that this could involve anything from stocking up on inventory to offering discounts and promotions. By planning ahead, small business owners can be prepared for anything the future might hold.
How Long Will Higher Interest Rates Last?
Kenny Natiss says it's hard to say exactly how long interest rates will remain as high as they are now. To put things into perspective, the Federal Reserve's recent decision to raise rates marks the largest single-day jump in 28 years. In 1994, Alan Greenspan made the decision to raise rates by 75 base points, mirroring today's move.
However, rates remained high throughout the 90s and didn't drop to their lowest level until the mid-2000s. It's fair to point out, though, that today's interest rates are far lower than they were in the 1970s and 80s when rampant inflation was hard baked into the economy says Kenny Natiss.
Although higher rates will have a sudden impact on small businesses, the long-term drop in inflation will benefit both buyers and sellers by reducing the cost of shipping, storing, and selling goods. For now, the American population will simply have to wait out the storm and let market forces bring down the exorbitantly high prices we've seen over the past year.
The Bottom Line
No one can predict the future, but by making a few smart financial moves, small business owners can protect themselves from the negative effects of rising interest rates says Kenny Natiss. By locking in a fixed interest rate, cutting back on unnecessary expenses, and planning for a decrease in consumer demand, small businesses can weather the storm and come out on the other side unscathed.
