Should Higher Interest Rates Stop You In Your Tracks?
If the numbers for your project make sense at today’s rates, consider proceeding with the investment.
By Ami Kassar
Interest rates are up – a lot!! Most SBA 7(a) loans today are priced at 11.25 percent, dramatically higher than the 6 percent rate we saw in 2022. So a fair question is, should entrepreneurs put expansion plans on pause and wait for rates to come down?
As I’ve written before, the answer is not always obvious. No crystal ball will tell us where rates will be in a year or two. We are living in unprecedented times as the world recovers from the economic shock of Covid. There is no playbook to determine what comes next.
As I think about this challenge, I am reminded of the day after Russia invaded Ukraine in February 2022. An entrepreneur canceled a call with me to discuss his expansion plans and needs. The world seemed too unsettled for him based on the new war, and he decided to put everything on pause. And now, some 20 months later, the war continues, but the world goes on—except his business is still in the same place.
Higher interest rates are a current reality of life. The cost of borrowing money is higher, and there’s not much we can do about it. And unless you have a clear conviction about what’s coming next, I think you have to accept interest rates for what they are and assume they probably won’t change for some time. If you can get comfortable with this assumption, you now have to decide your plans and if you will invest in your business’s growth.
If you want to borrow to expand and grow your company, you need a plan, a forecast, and a projection. You need to have confidence that you will make more money than your investment will cost, including the cost of capital.
If the numbers for your project do make sense at today’s rates, I encourage you to consider proceeding with the investment. And if the numbers don’t pencil out the way you’d hoped, you should pause and recalibrate. The business cases for expansion are tougher to make with higher rates—for capital, labor, anything else—and they should be. But this doesn’t mean that every scenario is dead. Maybe you should scale back your plans or proceed in stages.
In our uncertain world, it is easy to get paralyzed by fear. The winners will be those who can get in the right mindset, stay focused on their business and purpose, and stay disciplined in their decisions. The world is counting on entrepreneurs to make these choices and move forward.
Ami Kassar is CEO of MultiFunding.