As an SME entrepreneur, you probably have enough worries on your mind already, but there's a new challenge on the horizon that you can't ignore: rising interest rates. Why is this a problem and what can I do with it?
First of all, we need to understand what causes rising interest rates. One of the most important factors is the increase in inflation. Inflation is the increase in the prices of goods and services in the economy, which makes money worth less on balance.
When inflation rises, the European Central Bank (ECB) can raise interest rates to reduce inflation. This means flat out for business owners and individuals that it becomes more expensive to borrow money.
Why is this a problem?
Over the past decade we have experienced, on the one hand, a boom in consumer spending, which has pushed entrepreneurs' revenues to unprecedented heights (despite the dip caused by covid).
On the other hand, interest rates were historically low due to the deep and long banking and EU crisis in which the ECB kept interest rates artificially low and continued to pump money into the economy. A combination that led to both entrepreneurs and individuals being willing to lavish wallets.
Meanwhile, the tipping point seems to have been reached, where on the one hand the ECB's support programs have been phased out and interest rates are being raised (and presumably will continue to rise) and on the other hand consumer spending is declining.
Interest rates
Due to a decline in consumer spending, it is likely that SME revenues will decline. We already see this reflected in spending in more expensive consumer goods. Add to this the stagnation of the volume of construction, which after all can be seen as an engine of the economy, and finally, in the years 2014-2020 many financings were attracted at very low interest rates.
These interest rates will have to be extended in the coming periods, with an interest rate increase of >3% over the old rate not unrealistic.
In addition, banks are becoming more cautious about financing and this will also impact the interest rates offered. If you also have a loan that expires, you run the risk that your bank will not renew it as a matter of course.
So the knife could be cutting both ways.
What can you do?
As a business owner, make sure you stay in control. Prepare for a possible drop in sales, or at least look at what impact the downturn will have on your revenue. Not every industry is equally sensitive to a downturn. Create a realistic scenario for when the going gets tough and link an action plan to it.
Then there is the issue of rising interest rates on your current financing. What can you do about this? Don't wait and see. Get proactive and don't let your lender surprise you. Actively look at your existing interest periods and start making a plan in time. A month before your interest period expires, there's not much you can do
Alternative financiers
In addition, should the bank decide not to renew a loan, you will have to pay it off or know how to place it with another lender.
To find another financier you need at least a period of 4 to 6 months, if you want to (have) all possibilities investigated. Fortunately, these days there are plenty of alternative financiers besides the major banks. So actively check your conditions of current financing.
In short, challenges are ahead, but keep the initiative as you have always done as an entrepreneur and don't get surprised!
