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Small business owners are feeling pretty good about their financial prospects. According to February 2018’s NFIB Small Business Optimism Index, business owners have confidence in the country’s overall economy. Results from the report indicate that small business owners are raising wages, investing in their workers, and expect their sales to rise over the next year. That’s all great.
But that’s only part of the story. Lots of signs point toward major economic changes coming from the current administration. Interest rate hikes, wage growth, high employment, foreign trade agreements, stock market fluctuations, and federal policy changes can all impact the ability for small businesses’ ability to thrive.
Small business owners are among the first to feel shifts in the national economy. A slowdown in demand for your product, irregular payments from vendors, and higher prices for materials all eat into your cash flow—and quickly.
It’s usually impossible to safeguard against major economic changes as a small business owner, sure. That said, there are still lots of things you can do to mitigate the impact of potentially turbulent times. By being proactive and planning ahead instead, you just might save yourself hours of work and more than a few headaches. Not to mention lots of money, too.
We’ll talk through the most impactful economic changes that small businesses should keep an eye out for, and offer some ideas for how to make sure your business is ready for anything.
If the national economy were a car, interest rates would be its brakes. Low interest rates are akin to taking your foot off of the pedal: business loans become less expensive to take from banks, which means that the Federal Reserve (aka the Fed) is trying to spur growth. Higher interest rates are like pumping the brakes on how fast the country’s economy grows.
Putting a little pressure on the brakes can make this car—or the economy—operate at a safe speed. The Fed first raised interest rates post-financial crisis in 2016, and has continued to increase rates six times in total since then. These interest rate hikes impact small business in several ways.
When interest rates rise, banks become pickier about who gets to borrow their money. After all, the Fed’s interest rate is pegged only against the most creditworthy candidates (also known as prime lending). If your credit isn’t too great, your business loan interest rate is going to be a fair amount higher. Banks are focused on one thing: making their money back, and then some. When money is cheap for lenders to give out, there’s less at stake. Make loans more expensive, and banks get pickier.
There are two types of interest rates on loans. Fixed interest rate loans are loans that keep the same interest rate for the entire duration of the loan, regardless of what’s happening in the economy. If you take out a business loan with a fixed interest rate, the trend of rising interest rates won’t affect that loan. If you’re worried about excessive rate increases and you know you’re going to need some extra capital, or you’d like to consolidate or refinance existing debt, you might want to think about taking out a business loan with a fixed rate now to lock it in at a lower rate.
The alternative to a fixed interest rate is a variable interest rate loan. These are loans that quote interest rates in terms that fluctuate along with the economy, adding percentage points onto the “prime rate.” The interest rates applied to your loan can be changed without advanced notice due to interest rate increases by the Fed.
If you’ve already locked in a loan with a fixed rate, awesome: You’re protected from any increasing interest rates. But if you have a variable rate loan—or no loan at all—you missed out on cheaper rates than you could have gotten a few months ago, The thing is, variable rate loans float alongside interest rates as they change: your loan might be a fraction of a percent one quarter and jump to 2% the next.
The best way to prepare your business for a trend of rising (or falling) interest rates is to evaluate whether you think there will be a change in interest rates when you’re choosing between loan options. It may be advantageous to secure small business financing with a fixed rate if rates are rising, or a variable rate if they’re falling.
But should you be nervous? Not for now!
The rate increases we’ve seen so far are small. We’re talking about fractions of a percent at a time. But the big thing to look for, as with all things finance, is a trend. As money becomes more expensive to lend, you can expect banks to become even more picky about who qualifies for a loan. (Alternative lenders can help with that.)
→Too Long; Didn’t Read (TL;DR): Make sure you’re ready for interest rates to keep rising. Lock in a fixed-rate loan now if you can, or brace yourself for bigger bills down the line on variable rate loans.
Inflation is a marker of whether doing business in the broader economy is getting cheaper or more expensive. It benchmarks the increase in the price of goods and services in a country, and inflation is measured as an annual percentage change. Although inflation’s not generally great for business owners, the Fed (and most economists) see slow, steady inflation as a wholesale positive phenomena.
But how can small business owners sense when inflation is on the rise? After all, inflation is something observed over time, rather than all at once. The largest indicators of rising inflation are increases in food and commodity prices, which translate into higher production and materials costs.
For instance, if you own a bakery and grain prices increase, then you’ll have to raise the price of your bread when selling it to a consumer, too. So, inflation makes it more expensive to do business—and harder for people to spend their money efficiently.
Acquiring fixed assets—such as real estate or equipment—allows you to invest in tangible goods that retain value more than money in a bank might. Business owners who are interested in financing their growth should also consider taking on debt like a small business loan before inflation gets worse so that they can pay it off in cheaper dollars down the road.
The most basic, actionable thing that business owners can do ahead of time to protect against inflation is lock in prices on all contracts associated with conducting their business, including all suppliers and leases. That way, when prices increase, those contracts will stay locked in and safe.
As with any economic slowdown—the most extreme example of which is a recession—it’s helpful for businesses to be financially sound when things get uncertain. Preparing your business for the worst-case scenario means building a strong business credit score by paying bills on time and keeping your credit utilization ratio low.
→TL;DR: Inflation isn’t always bad, but you can make sure you’re protected from rising prices by locking in your contracts, investing in fixed assets, and working on how to get a business loan if you need one sooner rather than later.
Eight states kicked off 2018 with increases to their minimum wage. And there’s a good possibility that other states might also follow suit and hike their minimum wage rates in coming years. Some states allow small businesses to increase their employee wages slower so new policy changes don’t eat into cash flow too quickly. No matter what, this kind of change means that you can expect to allocate more money to your payroll as the year rolls on.
Every business faces the same challenge of offsetting higher wages. Your company won’t be the only one that has to find ways to pass along costs or make up revenue. These policies, which can help workers, can also end up helping you streamline your business operations, too.
Safeguarding your business against rising wage rates provides a great reason to stick to a strict budget and review your expenses consistently. For example, you might be able to absorb the hit by unsubscribing from unnecessary services, transitioning employees to part-time if necessary, or consolidating expensive, high-interest debt.
You’ll also have financial options for business owners if you’re struggling to make payroll under an increased minimum wage policy. For example, taking out a business line of credit gives you the flexibility to borrow up to a pre-approved amount of money and pay it off as you spend it. Using that line of credit as a rainy day fund could be really helpful in terms of large purchases (e.g., equipment) that might get pushed off as a result of increased wages—especially if you’re worried about making capital investments in equipment or raw materials right now.
This ensures that you’ll be able to invest in the right purchases to help grow your business, regardless of minimum wage policy.
→TL;DR: If the wages you’re paying to workers are mandated to go up, you might feel a payroll squeeze. But if you audit what you’re spending on, you can likely make ends meet—or take out a line of credit to help supplement your payroll.
Tax policy is complicated and technical for average citizens. It’s even more complicated when you add a business into the mix.
Although we don’t often see sweeping tax reforms like we did with the Trump tax plan this year, it’s important for business owners to have a basic understanding of how their finances might be affected by changes to the tax code when they do come along. The impact is especially relevant, since one of the major purposes of cutting taxes for small businesses is to stimulate economic growth.
The easiest way to stay ahead of the game is to keep up with the news. Seems simple, but it’s true—especially since it’s impossible to see the future.
Keep an eye out for changes to tax law, and make sure you’re making everyday business decisions that can help you reap its benefits. Whether you’re looking at new exemptions that might apply to you, or finding beneficial tax deductions you can claim, staying informed can help you save money and invest in your workers.
Money that you save on your taxes can supplement worker’s wages or bonuses, or be used to purchase new equipment. That’s why it’s so important for business owners to be in consistent communication with their business accountants about tax changes—because these policies can impact everyday decisions.
It’s not just everyday decisions that are impacted by tax policy—large business decisions like your business entity classification can have major implications as well. Following tax policy closely can help you keep track of deadlines to classify or reclassify your business.
→TL;DR: It’s hard to know how tax policy changes will affect you, so staying up to date with changes and how to take advantage of them is the best thing to do. Be strategic, and work closely with your accountant.
The economy is constantly evolving, yes. But one thing is for sure—if you stay informed, you’ll be in the best position possible as a small business owner.
Of course, it’s daunting to try to stay on top of every potential economic variable that could influence your finances. But take advantage of the resources available to you—whether that’s the news, small business industry websites, or your local community—in order to make the best decisions.
Also, look at trends in the markets, and keep your finger on the pulse of the economy. If possible, build a relationship with your primary lender, and always keep a dialogue open with your CPA. It’s not always easy to safeguard against risk, but by being in the know, you can stay a step ahead.