The state of the U.S. economy is top of mind these days. Inflation remains at historically high levels, with some recent easing, and the Federal Reserve has been gradually raising interest rates over the past year to help stabilize prices.
Higher inflation puts a strain on businesses through increased operational costs. Generally speaking, business profitability tends to decrease as interest rates increase. It’s no wonder that owners considering a sale or in need of a business valuation may be worrying how the combination of these factors may impact the value of their business.
While no one business owner can control the overall direction of the economy, you can control how you respond to these dynamics. Here are three ways you can potentially cut costs and increase the value of your business in the current economic climate.
Research alternative options
If your business needs a loan, consider more than one option for the best loan terms, including interest rate. While you may have an established relationship with a bank, there is always the option to see if another bank is able to offer you a better rate or other terms. Plus, it’s important to ensure your business has access to multiple sources of capital in case your primary lender is tightening its credit standards. However, don’t just look at interest rates in a vacuum. You should also take into account loan term, the impact of amortization on cash flow, upfront costs, covenants, and any early payment penalties (especially if you’re considering a business ownership transition). It’s also important to note that banking relationships are very important during a recession. In addition to considering the rate, also keep in mind the nature of your relationship, the approval process and whether the lender will be there for you when you need them in the future.
Consider an interest rate swap
Interest rate swaps are another way businesses can hedge against rising interest rates. An interest rate swap is an arrangement where two parties agree to exchange one type of interest payment for another. This swap occurs over a determined period. There are multiple different types of interest rate swaps, and not all companies qualify for these agreements. But, if you’re eligible, it can be a beneficial agreement that saves you money. If your business doesn’t qualify, then look for other places you can control costs.
Negotiate with your vendors
While business owners can’t control inflation, they can re-examine their cost inputs. Ask vendors if they can offer a better price. If they can’t, don’t be afraid to look at other options, if possible. There are often multiple vendors who can supply the materials you need.
While the changing economy can be challenging for your business, RKL’s valuation team can help you defend your profitability and value and assess the measures outlined above. Reach out to your RKL advisor or connect with us using the form at the bottom of this page.