Managing Your Companies Fixed Costs During a Rising Rate Environment

April 26, 2022

With inflation on the rise, the federal reserve has signaled that interest rate increases are coming. The exact amount of increase in interest rates is yet to be determined, but estimates right now expect that they will be raised anywhere from 5-6 times in the upcoming year. This is clearly a large number and one that will have a significant impact on a variety of aspects of our economy.

One of the chief areas that this will hit will be commercial lending. Businesses borrow money all the time for a variety of reasons, and rising rates mean that businesses will have to do more than ever to control costs. So, what can a business do to control its fixed costs in a rising interest rate environment? Here are some suggestions.

Accelerate Your Timeline

Interest rates are expected to rise in the very near future, perhaps as soon as the end of March. However, at the moment, they still remain low, hovering close to zero. Rising rates from the federal government mean that it will be more expensive to borrow money, and this will almost certainly have a variety of ramifications throughout the economy.

What does that mean? If you are taking out loans for fixed costs, considering business expansion, or looking to refinance loans as a way to control costs, now may be the time. With rising rates almost certainly on the horizon, borrowing money will get more expensive. This means borrowing now can help control your costs.

Refinance or Reduce Your Loan Duration

If you have any sort of loan that has a variable interest rate, you could be in for greater repayment costs imminently as the increase in interest rates means that your floating rates are likely to increase. This leaves you with two potential strategies.

First, you can refinance your loan, changing from a variable to a fixed interest rate. Doing so may mean that you are locking in a higher interest rate, but it is preferable compared to paying a rate that may go even higher if you remain on a variable interest rate. This is a very common strategy for refinancing, and as long as you can find a reliable banker who has a customer-service orientation, you should be able to refinance with ease. Just make sure that the refinancing serves not only your short-term interests but also protects the long-term future of your business.

If moving from a variable loan to a fixed loan isn’t an option, consider reducing the rate of your loan. You can do this by either refinancing the loan at a lower interest rate or simply paying it off faster — if you have the ability to do so. If you have multiple loans that may be impacted by rising interest rates, consider using a debt-repayment plan that will allow you to tackle the highest or most at-risk loans first.

Understand Potential Upsides and Downsides

Rising rates may put your business in a better position, depending on your business model and the specific nature of your fixed costs. Some fixed costs may not increase as a result of rising interest rates. For example, some items — like property taxes — may not be affected by rising interest rates. If this is the case, and you see an increase in investment returns elsewhere as a result of increases in rising rates, you may see positive benefits.

However, other areas are likely to see surges. Rent may be one such example: If you rent and have a landlord who is seeking to expand, you may see an increase in your rent necessary to support the landlord’s increased costs. Business expansion is another area that may be slowed by rising interest rates, as these rate increases will make it more expensive to borrow money, thus potentially slowing growth.

As you can see, the specific impacts of rising interest rates change depending on the type of business you run, the specific need you have to control costs, and what specific fixed costs you are trying to control. The best thing you can do is get a broad grasp of your individual financial situation, thus enabling you to make intelligent financial planning decisions.

Examine Spending Elsewhere

The simple truth is that fixed costs often cannot be moved. You cannot lower your rent or property taxes, and you probably can’t immediately reduce something like the costs of your employee benefits. This may mean that you have to audit your expenses and find other areas to save. This time period — more than ever — gives you a chance to do that.

As such, either working with your own accounting department or by bringing in an outside consultant, examine your spending. What sort of spending can you potentially examine, reimagine, reduce, or eliminate? Where can you achieve savings? Are there outside organizations you can work with that can help you identify methods to save money? Are there additional items you can put out to bid in order to get a better cost? Do your employees have any better ideas for how your business can achieve savings? Any effort to control costs in more discretionary areas can help you stay under budget and protect your business.