While the Federal Reserve's decision this week to leave rates unchanged was expected, it has put global markets on notice.
In a statement the Fed says it will be "closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation," especially if it considers raising rates in the future.
The group's December rate increase threw a pebble in the water, signaling to lenders that it's time to bump up the cost of capital, albeit only slightly, but up all the same. This means money will become more expensive. However, the good news is supply isn't tightening, yet.
The recent bump up shouldn't have been a surprise to anyone, interest rates are going to increase as the economy's health improves. The Fed's bet there is that the economy is stronger, unemployment is falling and the overall country can sustain higher interest rates.
For small business owners, the factor they need to be on the lookout for is if their access to capital is changing. When it comes to securing finance, people who need money the most either can't get it, or it costs a lot. For those who are low risk or don't really need the capital, they can access it at very low rates.
This rule means small business owners should always be lining up their capital flows, especially when they don't need it. It's good hygiene and can save you from dire cashflow problems if you lock in your funding ahead of when you need it.
Any further interest rate increases will be slow and steady but nonetheless, will affect entrepreneurs trying to finance their existing businesses or expand operations.
However, there could be a silver lining in all of this: banks, which turned away from small business lending during the financial crisis and in the years following, could return to this market if the economy strengthens. It's an area small business owners should keep a keen eye on as bank loans are usually a cheaper capital source.
While we're on the cost of capital, not all money is made equal. The macro market is still choppy which means traditional routes to funding are going to be mixed. However, alternative funding models, like Kickstarter or GoFundMe, are popping up as a result of technology advances.
Technology is also enabling the development of both project-based and equity crowdfunding, and peer-to-peer lending platforms, to administer and manage micro loans.
Business owners need to consult their advisors to help them understand when to take money and at what price. Access at any price is not always the best decision for a business but at the same time, a business can only run out of cash once. So when should you take the money and when should you run?
Xero U.S. Finance Director, Jim Gellas, explains there are a number of funding options small business owners can consider when trying to access capital, including selling goods or services upfront (like in a crowdfunding campaign), traditional bank loans, alternative lending (like peer-to-peer platforms), or taking an equity investment.
"Taking on some form of debt financing introduces the concept of financial leverage to a business," Gellas commented. "If an owner can earn a return of 12% on a sale, and is paying 5% in interest, they net a return of 7% without having to dilute their equity or disrupt cash to ongoing operations, assuming customer payment timing lines up."
When an owner has confidence that they'll be able to achieve that return above costs of debt, it can be the best opportunity to take advantage of access to capital. When there is less confidence in that investment return, it is a good time to do more extensive financial modeling to determine whether the risk versus reward makes sense.
"Business owners need to be careful not to take on too much risk," Gellas said. "Architecting a disciplined repayment plan that's based on actual data and realistic expectations will help ensure that a business doesn't get over-extended in its quest for capital."
What's the bottom line?
When locking in capital, small businesses need to ensure all their finances are up-to-date so they have the full picture when making a call on debt or equity facilities. Small business owners need to understand various lending sources and go in with a wary eye. And above all, vet the details of these financial scenarios with your accountant.