(Source & Credit: Forbes) — If you’ve opened a small business within the past few years, you can be forgiven for thinking that the interest rate market in 2022 is bonkers. After all, before 2022, it seemed as if interest rates would always be stuck at all-time lows, thanks to an extremely accommodative Federal Reserve policy in response to Covid-19. But over the past year, SBA 504 loan interest rates have nearly doubled, jumping from 2.97% in Sept. 2021 to 5.44% in Sept. 2022.
For small businesses living on the margin, this massive jump in rates can translate to some serious cash flow problems. So, what should you do if you run a small business that needs financing but you’re afraid of current rates? It might seem counterintuitive, but you may want to go ahead and get your financing now. Here are some of the reasons behind this logic.
1. Rates still remain relatively low.
There’s no denying the sticker shock that many small business owners feel in 2022. After all, in terms of interest rates, the past two years have been a panacea, with nearly unprecedented access to cheap funding.
But even with rates nearly doubling over the past year, it’s important not to miss the forest for the trees. Historically speaking, a 5.44% rate on an SBA 504 loan is not exorbitant. In fact, from 2004 to 2014, rates were quite often at this level or even higher, topping 7% in 2006, for example.
This may be small consolation for business owners who have gotten used to sub-3% rates, but the truth is that the last two years have been the anomaly, and today’s rates are just returning to what some would consider normalcy. Looking at the big picture, it’s the rate of increase that has been painful, rather than the absolute interest rate.
2. Rates may still go higher.
As hard as it is to hear, there may be a time in the not-very-distant future when small business owners will wish they had taken out loans at today’s rates. The Fed has all but promised that it will continue to raise interest rates until inflation is under control, even if that means boosting them well into 2023. With inflation still running at an 8.3% annual clip as of Aug. 2022, it seems as if rates will indeed continue to rise for the foreseeable future.
3. Your business may not be able to wait.
Small businesses live and breathe on cash flow. If you’re not at the point where your revenue and savings can quite sustain your business operations, you’ll need financing to continue. In most cases, this is true regardless of what interest rates are available in the market.
If you try to wait until interest rates fall, not only could you be in for a long wait, but your business also might not have the cash it needs to continue operating. Although no one wants to take out a high-rate loan, if it means the difference between the survival and the insolvency of your business, you may need to take the plunge now.
4. There are options beyond the headline number.
A Small Business Administration (SBA) loan is just one of many options that a small business has for financing. In fact, as a small business, you actually have lots of flexibility when it comes to raising money. In addition to SBA loans and traditional bank loans, you can work with a loan specialist to uncover a world of financing options, from merchant cash advances and invoice factoring to equipment loans and even personal loans, if you have good credit.
Small business credit cards are also an option, particularly if you can get a 12- to 18-month promotional 0% APY on new purchases and balance transfers. This alone could be enough to get you financing at a low cost while your business increases its sales and profits. Plus, many small business cards offer valuable perks, from sign-up bonuses to travel and purchase protections to organization of your business spending. Just be sure you’ll be in a position to pay off your charges when any promotional period ends—if not, you may need to stick to more traditional financing options.
5. You can usually refinance.
Perhaps the best news about taking out a loan with a high interest rate is that it doesn’t necessarily have to be permanent. Assuming you have a financing option that doesn’t have a prepayment penalty, if rates go lower in the future, you could pay off that loan with a new, lower-rate one. This will allow your business to get the financing it needs now while leaving the door open for a more affordable option in the future.
The Bottom Line
No small business owner wants to pay more for financing than is absolutely necessary—but the current needs of your business should always trump market conditions.
If your company needs cash flow to operate property, don’t be afraid to jump in and take out some type of loan now, knowing that future rates are unpredictable. If rates continue to grow higher, you’ll be happy you took advantage of today’s rates; and if they move lower, you’ll likely be able to refinance. While you shouldn’t take out loans you don’t need, don’t avoid getting money when you need it, either, even if rates are higher than they were last year.
Let LCD Group Help Grow Your Small Business
Visit LCD Group’s website for more information and contact LCD Group Loan Officer Derrick Becker at (701) 667-7622 or at email@example.com about the SBA 504 Loan today.
Special Note: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.