Can you believe the first four months of the year are already behind us? We are not officially experiencing a recession, but there are many financial pressures on businesses this year. Employee salary and benefits cost increases, supply chain issues and inflation are all impacting the cost of doing business, and you may be worried about your company’s financial picture for the rest of the year.
Some of our clients are asking for our assistance with cost-cutting and revenue planning. Some of our clients have started asking whether this is the right time to obtain or increase business credit. Some are asking about both. Every company is unique, but there are a few things we can say about business finance in general that may help you decide how to manage your company’s finances this year.
There is no way to tell you what is best for your company without having a reviewing your financial position. But here are a few considerations that may help you.
Interest Rates and the Cost of Money
Interest rates have climbed, and the projection is that there will be at least one more interest rate increase this year (2023), likely in the coming weeks. Taking a loan now means you will pay higher interest rates than you would have last year, but it may be the lowest interest rate available for at least the remainder of this year. Since no one has a crystal ball (not even the Fed), your decision needs to be based on much more than the interest rate you can get.
Loan, Line of Credit, or Business Credit Card
The decision to obtain financing may change based on the type of financing you take. There are three main options, and a couple alternative options too. Business loans are typically more difficult to obtain and require a more extensive application and approval process. A line of credit may offer greater flexibility – and possibly even a more favorable interest rate. A line of credit may also be easier to obtain.
The easiest type of credit a business can get is a credit card, but these are typically for much more limited amounts. We usually recommend our clients get a business credit card as soon as they open for business. Whether or not you already have one, there are still some credit cards out there offering favorable initial rates for companies that have a good credit rating. Some business credit cards can be obtained with a zero percent interest rate for an introductory period.
There are also alternative sources of funding you can consider, such as asking friends and family members for loans. We do not recommend using your home or other personal assets such as your retirement account as collateral for funding. And, in many cases, it is best to avoid taking on additional debt.
Our Advice: Focus on the Impact to Operations
You need to consider what not having the loan or line of credit would mean to your ability to operate efficiently. Inefficient operations could lead to a reduction in your profitability. But taking a loan may mean your costs will rise to a point where a price increase will be necessary. If you have already increased your prices this year, a second increase may cause a reduction in sales volume, which can also cut your profitability.
Still not certain what to do? Here is a blog from earlier this year in which we discussed three reasons to consider taking a loan. And if that still doesn’t clarify things, schedule a consultation with our Business Finance Advisor.
