Last week, for the first time in years the Federal Reserve slightly raised interest rates. For millions of small-business owners across America, this will likely mean a minimal increase in monthly interest expense.
If you're one of these business owners, how should you react to this new interest rate environment?
If you haven't done so already, it's time to do a debt check-up. Almost like going to the dentist every six months. List of all of your loan balances on a sheet of paper, with monthly payments, interest rates, early termination penalties, and any liens associated with the loan. Then sit down with your CPA, financial advisor, or banker and see if the historical loans still make sense.
There might be an opportunity to consolidate some of your loans into a more favorable rate or amortization, with some fixed rate protection. You might be able to increase your line of credit if your business is going well, even if you don't need the money today. As you work through this exercise, try to get the longest amortization possible for your term debt without any or minimal pre-payment penalty, to ensure flexibility in the future.
The last thing to do in this situation is panic. I promise you there will shortly be a lot of fear mongers urging entrepreneurs to take on more debt than they need today or to take on quick debt, in fear of rising interest rates.
It's highly unlikely that interest rate increases will be rapid. The Fed will most likely act slowly and cautiously. It could be a very long time until we see another increase. The recent hike is not a reason in and unto itself to do anything different.
Whenever you are taking on debt, you should always carefully understand if the rate is fixed or variable, and you should always ask the lender for alternatives or options. Typically, fixed rates or some version of fixed rates, are available, but at a premium. Then depending upon your risk appetite, and your thoughts on what will happen to interest rates, you can make the best decision for yourself.
Put a Debt Check up on your New Year's Resolution list. It's a smart and wise thing to do.