Is It Possible for a Small-Scale Business to Flourish Despite the Rising Interest Dominated Environment?

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Is It Possible for a Small-Scale Business to Flourish Despite the Rising Interest Dominated Environment?

Running a small-scale company comes with bigger troubles when the economic environment is driven by heavy interest rates. Under such unfavorable circumstances, it is very likely for the small-scale setups to fall into the pit of debts which further hinders the productivity of the business. However, it is not impossible to rise and make a comeback into the market if you adopt the right approach to understand your alternative solutions. There are several ways that can help to secure feasible loans leading to a better future for small-scale companies. Before delving into the golden life-saving hacks, let us go through the basics first.

Why do business owners need loans?

When you are running a business, it is not always sunshine and rainbows but a very tedious journey where you must face many highs and lows. There are many obstacles to be contended with such as tax payments, dwindling profitability, keeping up with interest rates, marketing, and more. All such problems can only be catered to when you have enough funds to meet your requirements and that is why business owners take loans to fulfill the needs of the company and keep it running on the same level. Borrowing money from a bank or a lender is a win-win scenario for both the recipient and the giver. The company owners can purchase supplies and equipment, fund inventory, pay their dues while the donor receives a percentage of their earnings called interest.

The dilemma of interest rates:

The problem with interest rates is that they never remain the same but are always subject to changes. Obviously, this greatly affects the stability of any business. When interest rates are high, the bank charges more of your earnings to pay interest on your loans, which reduces the profit. In times of low-interest rates, companies can benefit by saving more from their earnings and use them to expand their business.
The story seems feasible and accommodating till here but now imagine running a small-scale business and taking loans in an environment where interest rates are high. This means that if the interest rates are considerably high, the money lenders charge more for granting business loans which drags them into further jeopardy as they need to pay more of their earnings. Consequently, the profitability of the business decreases while the amount of debts increases which paves the way to bankruptcy and hampers the growth of the company. In order to keep the company running and still be a in position to secure some funds, many investors seek to adopt hedge funds.

What are hedge funds?

In simple words, hedge funds are a collaborative investment scheme set up by a moneylender who is a wealthy individual whose net worth exceeds $1 million. It is an alternative way of investment that mitigates loss and shields the business from the uncertainty of market rates.

Different ways in which hedge funds operate:

  • Specialize in selling private equity, which is the entire buying of privately-owned businesses.
  • Engage in buying only common stock which are the ones normally talked about in a stock market.
  • Sponsor and improve the business.
  • Funds that invest money to work in certain asset classes are the collaboration between the marketplace attributing similar laws and regulations.

Switch to short-term contracts:

To prevent yourself from staying up at night wondering about the downfall of your business, opt for a smarter way to combat your anticipated inflation. Short terms investments mean anything from several months to years resulting in lesser risks and more productive yields. It also gives you an opportunity to cash out your investment money at times of emergency which also protects your long-term bonds by providing you back up urgent cash at times of need.

Bond ladder:

Another strategy to fight off high-interest rates is to employ the bond ladder method. It is the purchase of multiple smaller bonds with fixed-income securities and different maturity dates. Fixed-income security provides fixed periodic payments which are prevented from unexpected changes of interest rates. Therefore, to ensure the safety of the investor, the payments are decided in advance to be given on a set date.

Fixed and adjustable-rate loans:

To remain on the safe side in a rising interest rate environment, it is a common approach to take loans that have fixed and adjustable-rate loans. This means that even if the interest rates increase to the skies, your interest rates will remain constant so you will pay the same amount of interest each time. However, the length of the loan should also be kept in mind as fixed-rate loans are mostly applicable on short-term agreements.

What is the cost of funds and why is it important?

Cost of funds is the sum of money the bank funds from different sources which could last in the long or short run depending on the customer’s choice. It is a crucial player in the market as it determines the lending rates of banks. These costs are subjected to changes according to the rate of the market and the direct and indirect sources from which banks fund the money. Therefore, such a system plummets the security and the viability of the customer because the high lending interest rates can increase the funding costs.

Best funding options:

If you are looking for funds to prevent your company from going out of business, then fret not because there are some feasible ways you can seek them through, if you know where to look. Even if you do not meet the business loan requirements, you still have options.

  • Merchant cash advance: It provides you a fixed amount of money in exchange for a percentage from your future sales until the full payment of the cash given at the beginning is paid.
  • Invoice factoring: If you have pending invoices, you can sell them to a buyer to get an advance amount of payment, usually constituting an upper quartile of the loan and you receive the remaining amount after the customer pays. This method can improve the circulation of cash ensuring healthy transactions. However, you might find yourself tangled in multiple collections to be paid for if any customers fail to pay their assigned bills.
  • Equipment financing: It is one of the feasible and simple ways to acquire a loan when you have bad credit. By this method, loans are made easily qualifiable by leasing or selling equipment which acts as collateral for the given loan until it is repaid. Make sure to keep the equipment in a good condition and refrain from using a loan on damaged or worn-out articles, otherwise you will be investing in a piece of futile equipment.
  • Peer-to-peer lending: It gives people an online platform to connect the borrowers and the lenders. However, it is free of traditional rules and laws of investment which might increase the risk of fraud and cybercrime.

Maximize the gains:

The major aim of any business setup is to ensure increased profitability and decreases the chances of potential losses. Therefore, there are some golden strategies to help you improve your profit even in times of high-interest rates.

  • Increase the costs of your priced goods and services without hampering your sales.
  • Introduce discount schemes and bundles to attract more customers, thus, increasing your overall sales quota.
  • Improve your retail displays to publicize your products and services more efficiently to heed more attention from the market.

Decrease the costs:

Maximizing your profit is not the only way to secure a strong position against the rising interest rates, but you should also focus on decreasing unnecessary costs.

  • Collaborate with better suppliers for raw materials and services and negotiate discounts with them.
  • Focus more on the items/services which are more in demand and bring you profits.
  • Reduce indirect costs like hiring and training a capable staff to prevent the loss of potential customers.

Lastly, all you need is vigilance

The last and but the most important strategy to keep up with high-interest rates is to remain vigilant of the stock market rates, new policies, and laws for funding, and lookout for opportunities to maximize your sales keeping in mind the market demand and supply chain. Moreover, always keep emergency funds ready in case a high-interest rate smash you with heaps of undue loans. In addition to that, try to settle with short-term loans which are designed to eliminate hefty loans which might slow down the productivity of the business for a considerably long time. It is not a very clever idea to take up loans to pay off other debts even if you are contracting for a short term because this might put you in a never-ending debt crisis. It must be understood that loans with interest are not a step to be taken lightly and should always be efficiently and carefully planned, keeping all the pros and cons in perspective.