Rate Increases Impacting Businesses

What to expect and how to prepare

By Don Clary

ate increases to combat inflation are the hot topic these days among individuals in the housing market and small business owners. Following the pandemic, the Federal Reserve made plans to raise interest rates several times throughout this year and, in fact, the first of these rate increases went into effect in March and April.

These were the first increases since 2018 and were met with mixed emotions due to the length of time between rate increases and the number of rate decreases we have seen over the last few years. These rate increases are being done methodically to slow the economy, which will inevitably curb inflation, which is the end goal.

Rate increases will greatly impact businesses across the state. Loans will become more expensive, leading to a profound impact on local businesses—particularly the smaller businesses who were already affected by the pandemic. Businesses will be affected based on the types of loans they currently hold or new loans they acquire. Those with variable-rate debt will be in the most vulnerable position and, in some cases, those rates may have already risen. Those with fixed-rate loans, such as those through the Small Business Administration, or SBA, will be in a better position since their rate is already locked in and completely stable. Businesses looking to receive new loans will be held to a different standard than in the past. With each new application, lenders will scrutinize them more closely, making sure suitable collateral is securing each loan, leading to a possible decline in loan growth for the state. This decline could impact the number and amount of loans distributed in comparison to previous years.

Over the remainder of 2022, the Federal Reserve will focus on the national economy. They will need to balance future rate hikes to curb inflation and their impact on businesses. And, although COVID-19 seems to be in the rearview mirror with case numbers on the decline, businesses will still need to be cognizant of its possible continued influence. For instance, the continued issues with employee acquisition and retention will require businesses to continue to work hard to attract and maintain talent. Additionally, there will need to be a subtle yet consistent focus on business stability and even growth to offset the impact of rate increases and other factors related to COVID-19.

There is still positive news for Alaska. As we come out of the last two years, we find ourselves in a better position to weather some of the adverse effects of the pandemic. With the recent increase in oil prices, we find ourselves in a better position to obtain consistency in the state budgetary process. And, with the beginning of this year’s tourist season looking like it will be one of the strongest on record—at least compared to the last several years—we have a little glimmer of hope that the state economy is rebounding.

Businesses can do several things to prepare for rate increases and possible negative impacts to their bottom lines. It is the perfect time to pressure-test your company. Figure out where there are weaknesses and address them. Have ongoing conversations with vendors and clients. This will add to your assessment and will help you understand the current environment as it pertains to your specific business. It will also help to understand supply chain issues so you can better equip yourself to continue as a prosperous business while meeting the needs of your clients and business partners. This will help you to surround yourself with partners and tools that benefit each and every part of your business.

Create connections within the communities that can assist you now and well into the future. This is the perfect time to strengthen our outlook and prepare for the next phase, even with impending rate hikes and an unsure economy.

It’s time to look toward the future and try to maintain a positive outlook. Don’t focus on the impacts of rate increases; rather, focus on what can make your business stronger. If you can formulate a business plan that can withstand tough economic times, then you will have a path to sail through both easier and challenging times. Build your connections and knowledge base so you can serve your clients to the very best of your ability. Today is the perfect time to solidify your business and make it as strong as possible.