As interest rates climb, small businesses are increasingly wondering how it will affect their finances. In fact, a survey from Goldman Sachs found that 88% of small business respondents said inflationary pressures on their business have accelerated since January 2022. One way to hedge against inflation and obtain more stable cash flow is by refinancing to a fixed-rate loan. Here’s what you need to know as you weigh your options.
What is the difference between a variable and fixed-rate loan?
Before you start the refinance process, it’s important to know what type of loan you currently have. If you have a fixed-rate loan, then you are already set, as these types of loans have interest rates that are locked for the life of the loan. That means the rate won’t rise, even as broader interest rates do. However, if you have a variable-rate loan, now is the time to look into refinancing it. That’s because the interest rate will likely continue to escalate, boosting the amount of your payment.
Many small businesses rely on a business line of credit to finance unexpected or fluctuating short-term expenses like additional inventory or payroll for temporary staff. A business line of credit may be a savvy funding choice because rather than borrowing a lump sum, you tap it only when you need it – and therefore only pay interest on the amount you’re actively using. However, they typically have variable interest rates, which means you could be paying more than expected.
Your banker can work with you to ascertain how your loan is structured to determine if your payment will rise, as well as how often, and – most importantly – by how much. They’ll then talk you through additional options that might be available with more favorable terms, depending on your needs and goals.
What are the advantages of a fixed-rate loan, especially in this environment?
If you determine you have a variable-rate loan, you may be able to refinance it to a fixed-rate loan to protect you from future increases. Even though the Fed recently announced the biggest interest rate hike in 22 years, it still might be the right time to take action, given that multiple rate hikes are expected throughout 2022.
While it’s common to question the value of taking a loan amid rising rates, sometimes you have to borrow money to make money. That’s because the overall economy is still booming, and your small business could use the cash infusion to take advantage of business opportunities that present themselves.
For example, a loan allows you to expand your locations or inventory, acquire new equipment and hire workers – all of which may potentially yield an appealing return on investment you wouldn’t want to miss out on. Your local small business banker will help you assess the landscape and benefits of getting a loan.
Who is a good candidate for refinancing to a fixed-rate loan?
In today’s fluctuating economy, banks are becoming more selective about granting loans so you want to stand out as a solid applicant. First, check your credit to ensure it’s healthy. A lender may be more hesitant to make a loan to a business with credit blemishes, and a low score could cost you in a higher interest rate.
It’s also advantageous to build a relationship with your small business banker and look to them as a partner in your success. Present your business plan and familiarize them with your goals and profit outlook, as well as your strategy for attaining them. They can be a key ally in securing the funding you need.
What should small businesses look for as they assess their lender?
Choosing the right lender has an incredible impact on your business. Look for a bank that welcomes your interaction and is willing to sit down and discuss alternatives available to you. Most small business owners aren’t financial experts, nor should they have to be. Turning to a professional allows you to get solid advice about the best type of loan for your goals and objectives. While many financial tasks can be completed online, make sure you’re also able to tap the expertise of someone who will provide personalized advice relevant to your situation.
Many small businesses find the most favorable terms come through a loan from the Small Business Administration (SBA) so look for a lender with a strong SBA track record. And finally, consider using a lender who’s enmeshed in your local community and/or familiar with your industry. This background knowledge proves invaluable in advising you on the optimal banking products – including loans – for your circumstances.
Are you ready to talk to a local banker about obtaining or refinancing your loan? Contact Valley today to discuss programs that are potentially right for you.