Over the past few years, there have been significant changes in business expenses. Increases in interest rates, after many years of historical lows, as well as significant changes in the cost of labor, mean businesses may need to reassess the carrying costs for their working capital, and then adjust their pricing or payment terms accordingly.
“Businesses should take the time to assess whether they have factored in all of these changes now that the various programs — federal stimulus programs, for example, that might have masked those increases have ended,” says Matthew Leuenberger, SVP, Commercial Banking Team Lead, at Premier Bank. “It’s also important for businesses to recognize all of the changes in their cost structure, something that has shown to be a significant issue for many companies.”
Smart Business spoke with Leuenberger about ways businesses can adjust to the increased costs and uncertain economic conditions.
How can companies address interest rates in their cost structure?
Because interest rates have increased so much, some business owners may wonder whether this is the right time to make a major capital purchase. However, labor rates are high as well. So, if there are equipment or technological improvements that can help eliminate the need to hire for positions that a company has been unable to fill, or that have just become too expensive to fill, it could make long-term sense to make such an investment.
Also, there are some unique opportunities on the equipment finance side where business owners can use programs that are offered at the state level to lower the all-in rate for some of these equipment acquisitions. For example, the state’s Regional 166 Direct Loan program has been utilized to help reduce the overall interest rate expense to the business owners on such transactions. This program offers loans to businesses for projects related to industry, commerce and distribution, or research activities.
What effect has uncertainty had on businesses?
While a tight labor market remains a challenge for many employers, it is not the most significant issue that most are worrying about. Instead, what seems to be of a greater concern is the uncertainty over what is happening with demand. That has led many business owners to hold back or take a wait-and-see approach to certain strategies as they watch what the economy is doing — whether there is truly a recession on its way or if the economic conditions are essentially status quo. That has created a hesitancy among business leaders to make some of these more significant moves, such as an acquisition or financing new equipment.
That, seemingly, has caused more business owners to pause their decision-making than the interest rates on their own. There is a pervading sense of uncertainty regarding the economic environment going forward.
What opportunities should companies consider in this market?
Though costs are a concern, this may be a time for some to grow operations or market share by scaling through expansion or acquisition. As part of the planning process, companies should work with their banker to review each scenario to determine if an acquisition or expansion can help the business to achieve the desired growth objective or obtain the needed efficiencies.
As companies consider purchasing automated equipment or new machinery to gain efficiencies and help reduce overall labor, bankers are doing a lot of reviews with business owners who could use the equipment to see if it will meet their needs and achieve their desired results.
The business environment has had a lot of changes, but it might be settling into a new normal. Business owners should take a step back and assess whether they have captured all the changes in their cost structure that have been caused by the interest rate, labor cost and various commodity price increases. This is also a good time to utilize their banker to discuss, review and analyze the opportunities to grow within these changes. ●
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