Rising Interest Rates: How Can Canadian Startups, SMBs, & Franchises Overcome the Challenge?
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24 Jun 2024
Inflation is rising, and the Bank of Canada is coming up with different measures to control it. However, the situation has led to an overall rising interest rate environment.
While it is good for achieving price stability, there are definite challenges for Canadian businesses, such as small and medium businesses, franchises, and startups, who might be severely impacted by the high prices.
What should you do to survive and thrive in this situation?
Business Planning Solution Canada firm CJCPA roped in its experts to write about the impact of rising interest rates on businesses and strategies that will help mitigate risks and secure funding options.
Check out our blog, which will help you sail through this period and ensure that your business grows despite the circumstances.
As we learned, rising interest rates can pose serious challenges for growing businesses. Here, to weather the storm, they need to proactively implement these strategies:
Rising interest rates are an obstacle for growing companies and startups. However, careful planning and proactive strategies can help your business stay afloat despite the issues. While these are not cookie-cutter solutions, they will surely help your business go in the right direction.
Do you need help with accounting services for your small business? We’ve got you! At CJCPA, we offer financial planning, debt management, and personalized tax-saving options to rising businesses.
To book your consultation with a small business accountant Surrey, fill out the contact form on the Contact Us page. We’ll assist you in developing a custom strategy that will address your issue and grow.
What’s the impact of rising interest rates?
Usually, the Bank of Canada controls inflation by adjusting its target overnight rate. Thus, when interest rates rise, borrowing costs increase across the board. If your business relies on loans and lines of credit for operational and other purposes, it can have a significant impact, including:- Startup Funding: Startups often depend on venture capital, angel investors, or bank loans to fuel their initial growth. When interest rates are rising, it can make it costly for startups to fund their businesses, and it may also slow down the fundraising process.
- SMBs and Working Capital: Small and medium-sized businesses frequently make use of lines of credit to manage day-to-day operations and seasonal fluctuations. When there is an increase in rates, it will make managing working capital costly, and it will further impact profitability.
- Franchise Expansion: Pretty often, franchises have to finance themselves to open new locations. In light of rising interest rates, it will be difficult for these businesses to secure loans, which will further cause problems with expansion.
- Reduce Consumer Spending: Now that borrowings are expensive, consumers will tighten their belts, ultimately decreasing their demand for goods and services. It will severely impact the business.
- Slower Economic Growth: Ultimately, the high interest rates restrict overall economic activities, which does restrict market opportunities for businesses.
How can businesses mitigate risks and secure financing?
As we learned, rising interest rates can pose serious challenges for growing businesses. Here, to weather the storm, they need to proactively implement these strategies:
- Cash Flow Management: Businesses, especially small ones, must maintain healthy cash flow reserves, as periods of economic uncertainty can become crises real quick. They need to analyze expenses, identify areas for cost reduction, and make debt repayment a priority.
- Financial Forecasting: You should factor in interest rate hikes while making a financial forecast. Due to this, your business will be able to anticipate future financial needs and stay aware of their borrowings and investments.
- Debt Consolidation: For a business with multiple loans and different interest rates, it is better to turn them into a single loan with a low rate of interest to simplify debt management and reduce borrowings.
- Alternative Financing Options: You can explore alternative options for financing. For example, you can sell outstanding invoices for immediate cash, lease equipment instead of purchasing it, and sell a portion of future sales receivable for immediate cash.
Try these hedging strategies for existing debt
For a business that has variable-rate debt, they should consider hedging strategies that mitigate the impact of rising interest rates. Here are some options:- Swapping interest rates: In this financial contract, one can lock in their fixed interest rate for a specific period, which will protect them from future rate hikes.
- Interest Rate Caps: Businesses can set the maximum interest rates they are willing to pay on the variable-rate loan. It will offer protection against some rate hikes. However, it may also come with an upfront cost.
Wrapping it up!
Rising interest rates are an obstacle for growing companies and startups. However, careful planning and proactive strategies can help your business stay afloat despite the issues. While these are not cookie-cutter solutions, they will surely help your business go in the right direction.
Do you need help with accounting services for your small business? We’ve got you! At CJCPA, we offer financial planning, debt management, and personalized tax-saving options to rising businesses.
To book your consultation with a small business accountant Surrey, fill out the contact form on the Contact Us page. We’ll assist you in developing a custom strategy that will address your issue and grow. 
