For business owners, deciding when to borrow can be just as important as deciding how much to borrow. Whether you’re purchasing equipment, expanding your operations, or managing cash flow, interest rates play a role in those decisions.
With rates higher than the historically low levels we became accustomed to over the past decade, some businesses may be holding off on major investments in hopes that borrowing costs will come down.
But waiting for lower rates isn’t always the best move. The more important consideration is whether the investment makes sense for your business and whether the financing fits your needs.
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- Looking Beyond Interest Rates
- Does The Investment Make Sense Right Now?
- Consider the Structure of Your Financing
- Know What Your Cash Flow Can Handle
- Don’t Overlook Existing Financing
- Focus on What Works for Your Business
Look Beyond Interest Rates
Interest rates are influenced by several factors, including inflation, economic conditions, and Federal Reserve policy. While it’s helpful to understand what’s happening in the economy, predicting where rates will go next isn’t easy.
Rather than trying to time the market, business owners may be better served by focusing on what they can control, including how much they borrow, the terms of their financing, and how the investment will benefit their business.
Here are a few things to consider when evaluating your borrowing options.
Does the Investment Make Sense Right Now?
Not all borrowing decisions are the same. Some investments are necessary to keep a business running, while others create opportunities to grow or operate more efficiently.
Consider a business that needs to replace aging equipment. Waiting for interest rates to decline could mean lower financing costs, but it could also mean continued repair expenses, slower production, or missed opportunities.
Before putting an investment on hold, consider what it could accomplish. Will it help increase revenue, reduce expenses, improve efficiency, or address an immediate business need?
It’s worth weighing those benefits against the cost of borrowing, as well as the potential cost of waiting.
Consider the Structure of Your Financing
The interest rate is important, but it’s only one part of a financing decision. The type of loan and repayment terms can have just as much impact on your business.
Fixed vs. Variable Rates
Fixed-rate financing offers predictable payments, which can make budgeting easier, particularly for longer-term investments like equipment or commercial property.
Variable-rate financing may offer advantages for certain needs, such as short-term borrowing or lines of credit. However, borrowing costs can change as rates fluctuate.
Neither option is necessarily better. It depends on how you plan to use the funds, how long you’ll need the financing, and how comfortable your business is with potential rate changes.
Choosing a Loan Term
A shorter loan term generally means higher payments but less interest paid over time. A longer term can make payments more manageable, although it may increase the total cost of borrowing.
For equipment purchases, it’s also worth considering how long the asset will be useful to your business. Ideally, you don’t want to continue paying for equipment long after it needs to be replaced.
The right terms should make sense for both the investment and your cash flow.
Know What Your Cash Flow Can Handle
Before taking on additional debt, consider how the payments will affect your day-to-day operations.
Can your business comfortably make the payments during a slower season? What happens if operating expenses increase or an unexpected cost comes up?
Looking at a few different scenarios can help you determine how much debt your business can reasonably manage.
It’s also important to maintain enough flexibility to cover regular expenses and respond to unexpected challenges. A financing decision that looks manageable today should still make sense if business conditions change.
Don’t Overlook Existing Financing
Smart borrowing isn’t just about new loans. It may also be worth reviewing your current financing to see whether changes could benefit your business.
Refinancing could provide an opportunity to reduce borrowing costs, adjust repayment terms, or move between fixed and variable rates.
But a lower rate doesn’t automatically mean refinancing will save money. Fees, prepayment penalties, and the remaining loan term can all affect the overall cost.
Before making a change, compare the total cost of your existing financing with the proposed new terms to determine whether refinancing makes financial sense.
Focus on What Works for Your Business
Interest rates will continue to change, and there’s no way to know exactly when borrowing conditions will be most favorable.
Before making a financing decision, consider what you’re trying to accomplish, how the investment will affect your business, and whether the repayment terms are manageable.
The right decision isn’t always about waiting for a lower rate. It’s about understanding your options and choosing financing that makes sense for your business.
This article was written by Mary Laughlin, Commercial Relationship Manager at Core Bank
