It costs more to borrow money these days. Inflation is soaring for all sorts of reasons, and the Bank of Canada has increased interest rates to bring it back to Earth. The central bank recently raised the overnight interest rate from 0.5 to 1 per cent, the biggest increase since 2000.
So what does this mean if you’re starting a new business? Or if your business wants to expand? If you were planning to take on debt, you might want to reconsider your options. Luckily, co-ops have tools at their disposal that can help you get through rising interest rates unscathed.
If you’re part of a co-op that needs capital, here are some tips for navigating this time of financial change:
- Re-think where you raise money. Though loans are a popular way to access capital, co-ops have some options that can help during times of increasing interest rates. Rather than approaching financial institutions for loans, try asking members to issue member loans or purchase investment shares. This type of “patient capital” won’t come with the high interest rates of commercial loans and lines of credit, and you can negotiate terms that work best for your business. For example, when you’re negotiating with your own members rather than banks, you can agree that the co-op will start to repay the loans once it starts to make a profit.
- If you do need to borrow, do it now and lock it in. The Bank of Canada has indicated interest rates may continue to climb, so the cost of borrowing will probably keep rising. If you need to take on debt to finance a big expense or expansion, do it sooner rather than later. Also, opt for fixed interest rates so your loan payments don’t rise as rates go up.
- Hang on to your cash. Having ample cash reserves to cover unexpected costs or investments will help you avoid higher interest rates. Hold off distributing profits back to members right now and increase your prices accordingly to ensure you’re holding on to sufficient cash. The upside to high interest rates is that higher rates are now available on your savings! So, you can find high interest savings accounts or (if you have cash you won’t need to access right away) GICs that offer higher rates of return than we’ve seen in a while. If possible, tuck cash reserves into one of these accounts so your money can grow.
- Ensure you’ve got a sound business case for big purchases. Things are more expensive today than they were last year. If you’re planning a big purchase or investment (like a new location or new equipment), ensure the return you’ll get on that investment covers the extra costs. Crunch the numbers to determine whether the big purchase will increase your sales or improve efficiency and save you money. Today’s inflation rate is (hopefully) temporary and prices won’t continue to soar forever – you may be able to make big investments later when markets adapt (for example, once supply chains catch up to demand).
To do what’s best for your business at this time of increasing rates, be cautious with the co-op’s money, weigh big decisions carefully, and consult your members and experts about big financial decisions. By using your co-op’s tools to your advantage – like member loans or pausing profit sharing – you can keep your business stable and sustainable.