Coping with higher rates

When the Federal Reserve’s policymaking committee raised its target for short-term interest rates in March to 4.75 percent, it was the 15th such increase since 2004.

Until this two-year-old interest rate-tightening campaign ends (which is possible later this year), what are small- and mid-sized businesses to do?

Asked about their short-term outlook, 55 percent of business owners nationwide say the likelihood of further interest-rate increases will negatively affect their business. In this recent survey of 1,100 owners and executives commissioned by The PNC Financial Services Group, Inc., 61 percent of the respondents — with annual revenues up to $250 million — said higher rates have a moderate to significant adverse impact on their cash flow/profitability.

Ben Willingham, senior vice president for corporate banking at PNC Bank, told Smart Business that there are a few steps that businesses can take to adjust in this higher-rate environment.

If a person is interested in investing, what should his or her first step be?
Put your money to work now. Now you can shop around and find a money market account that might yield more than percent. Even though rates aren’t as high as they were five or six years ago, don’t pass up a chance to allow your money to make money for you.

If business owners need to grow their business, is it wise to borrow now?
Review your credit lines. If you need to borrow to grow your business, don’t despair. Short-term rates can still be reasonable. So shop around. Just remember that borrowing will cost you more than it used to. Many short-term lines of credit may be indexed to an industry benchmark. That means as the rates rise, the interest rate on the line of credit may also rise.

Can companies continue to have higher debt loads?
Use excess cash to pay off debt. If borrowing is not something you need to consider right now, you might want to pay off your existing loans with the cash you have on hand. In fact, in PNC’s survey, 50 percent of business owners surveyed said they would begin to pay down their debt in light of increasing interest rates and improving cash flow in their businesses.

In the banking/financing arena, how important are the terms that banks and financial institutions offer businesses? How important are the terms suppliers offer businesses?
They are both important, so you should make sure you understand the terms. If your suppliers offer you trade terms, such as 30 days to pay your invoice, you may want to take advantage of them. This extra time may not have been important to you when rates were low. Now it may be advantageous to take the extra time.

On the other hand, taking a discount for paying early might make more sense if you have the cash. On the other side of the ledger, you may want to reconsider the terms, or time you are giving your customers to pay you. Fifty-one percent of respondents in PNC’s survey said they are considering a change to the credit terms offered to customers, and 56 percent said they would offer discounts for paying early, two actions that are likely to speed up cash flow.

What should my next step be?
Talk to your banker. Before you make any decisions, have a cash flow conversation with your banker. The cost of that precious commodity is higher right now, and when costs are rising, businesses should reconsider their thinking.

This summary is not legal or financial advice, and does not purport to be comprehensive. Please consult your own advisor. Any reliance upon this information is solely and exclusively at your own risk.

BEN WILLINGHAM is senior vice president for corporate banking in Ohio for PNC. Reach him at (513) 651-7558.