Why changing interest rate will affect your financial structure (and determines your business survivability)

Interest rate is a very important element in the world of business and finance. It is the cost of using money and will therefore affect the cumulation of business net worth. It is an element that can be affected by a variety of factors for example geopolitical tension and protectionism, just to name a few.

Interest rate is and must be an item most watched by business leaders and entrepreneurs. If you don’t understand the mechanics of interest and how it can greatly affect your corporate financial management that determines the survivability and prosperity of your business, you have not master your business well. At time it goes beyond your financial statements. For instance in carrying out practical analytics, the market value of your company’s debt may be more relevant than your book value.

Hence changes in interest rate will affect your financial structure that will determine your business survivability and here are some of the key impact on how high interest rate will affect your business survivability.

1.  High interest rate that is experienced by most businesses now limit borrowing capabilities therefore limiting expansionary plan of a business. Instead it may even force your business to changes your business model and restructure which potentially can reduce business valuation.  

2.  It will increase your burden to service existing loan. Undoubtedly a higher percentage of your expense will have to go into paying the higher interest. Though you may get reduction or relief in terms of interest payment being a deductible against your taxable income but from a cashflow standpoint, it will impact your financials.

3.  Higher interest payment can also lead to risk of default and potential bankruptcy. It affects your cost of capital and this may be the worse outcome from the impact of interest rate hike. Under such circumstances, getting a bailout or additional loan to tie over will prove to be very difficult unless you are willing to take on high premium risk or stand as personal guarantor.

4.  The impact of interest rate hike is not confine to your home country. If there is a higher interest rate in another country there will be a demand pull on that foreign currency which may lead to your local currency devaluation. This weakens your local currency purchasing power and will impact your purchase of foreign goods and services needed for your business. However cheaper currency may also lead to higher demand for your goods and services and hopefully it will be more than offset your downside effects.

5.  Potential business challenges pose by higher interest rate can also lead to difficulty in getting the best talent for your business. It is natural for talents to want to work for good and stable companies.

In the midst of these challenges businesses you need to up your game to anticipate and counter its effects and here are a few ways to do so.

1.  Increase productivity - Productivity growth means getting more from your work and from your investments. With higher productivity it will lower operating cost and increase earnings per employee. This upside can offset your downside from interest rate impact.

2.  Focus on innovation drive – Innovation and better ways in doing things or generating new products and services can leverage your cost pool and expand your new market.

3.  Intelligence analytics – Financial and business analytics is a great way to scout for new growth. It helps in identifying new growth levers and spot new opportunities, normally hidden from the obvious.  

4.  Change in business model – Never stand stagnant in the midst of aggressive changes in the current business climate. Your business model and value proposition may be up for review.

✷. ✷.✷.✷.✷.✷.✷.

While we may not be able to have a direct control on the many factors that affect changes in  interest rate, there are still quite a number (the above are just a few suggested) of initiatives that you can implement to counter the interest rate impact and still come out as winners.