“You must gain control over your money or the lack of it will forever control you.” ― Dave Ramsey

At the risk of sounding like a broken record, we have been stating for several months now that rising interest rates will not only make borrowing more expensive, but loans will also become harder to obtain as banks and lenders, in general, start to review the risk portfolio of their investments. Now that we are in the middle of November of 2022, and in the heart of budget planning season, we are revisiting the whole concept of debt to ensure that our readers are considering all aspects of being indebted.

For those of you who already have some loans on your books -— whether it is through a bank, private investor, or a member of your family — in some ways you are lucky. Prior to January 2022, the federal funds rate was at 0.25%. After its meeting in early November, the Federal Reserve increased the rate to 4.0%, a 375 basis point increase since the start of the year. This interest rate increase has a multiplication effect on the preparation of your 2023 budget:

If you have loans with a variable interest rate — for example, most lines of credits offered by banks — then you have already felt the pain of having your interest expense increase over the past few months. Based on most prognosticators who track the Federal Reserve and its strategies, we believe that interest rates will remain at this level for at least twelve months. So for the businesses who have variable interest rates on their loans, you should anticipate a higher interest expense in 2023. (You also might want to consult your CFO to see if refinancing the debt to a fixed interest rate makes sense.)

If you don’t have any loans on your books, it might be more difficult to obtain a loan than it has been for the past several years. With the rise in interest rates and slowdowns in the GDP, most financial institutions are scrutinizing loan applications much more carefully. And with this scrutiny, the SMB community has a greater likelihood of having the loans rejected or paying a higher-than-market interest rate. So if you are planning to get a loan during 2023, make sure that you are adequately budgeting for the closing costs and interest expense to be incurred.

And don’t forget to account for the higher interest expense that current and potential customers of your product or service will be bearing as well. Many industries in the business-to-consumer markets should expect to see a squeezing of money being spent by customers due to rising interest rates as well as higher inflation rates. So if you are running a business that relies on stable or rising discretionary income of your customers — think hospitality, live entertainment and consumer goods — you might want to consider lowering your revenue expectations to reflect the impact of higher interest and inflation.

If you are running a business, the reality is that you have to incur some debt in order to sustain your current operations and ensure that you have operating cash flow to pay your bills. But you must make sure that you are not so reliant on the debt that it ends up impacting your free cash flow to allow you to invest in your business.

Takeaway: If you need assistance in assessing your debt/equity ratios and determining your strategy in defusing your risk of your borrowings in 2023 and beyond, reach out to Brian or Scott at info@acceleratingcfo.com.

Brian Califano