As the Fed moves to gradually raise the federal funds rate, small business owners should take stock of their cash flows. Doing so now will help small business owners gain access to the capital they need when they look to expand or grow their business. It might seem counter-intuitive. If you know that rates are going to rise then why not gain as much capital flow as you can now? Here are a few reasons why you should think carefully before approaching a lender now.
First, raising the rate is a good thing. It shows that consumer confidence is building and that the economy is gaining strength. However it also means that lenders will increase their interest rates and closely analyze risk. If your business is low risk and if you maintain steady cash flow then lenders are more willing to invest at a lower interest rate. But if your organization has depended a great deal on capital flow with limited cash flow then your accounts do not look good on paper. The perception is that your business depends on capital, not cash, to survive.
Fortunately no one wants to see small businesses suffer, including the Fed. A blow to small businesses will impede any further strengthening of the economy. This is why the Fed is slowly raising rates. As interest rates rise, invigorate your cash flows by taking advantage of the strong economy.
As mentioned earlier, a stronger economy means greater consumer confidence and spending. In such a scenario your business is poised to benefit greatly. Your cash flows will strengthen. You might want to hire more people or expand into new markets or products. When lenders look at your books and see that your capital flow outweighs your cash flow they might consider an investment too risky, resulting in your business’ inability to expand at just the moment when expansion is optimal.