Running a Business with a High Cost of Capital: 7 Key Steps to Optimize Operations

The Federal Reserve has maintained its 5.25% to 5.5% overnight lending rate for almost a year. The last time the Fed imposed a rate this high was in 2001!

This overnight lending rate is the borrowing rate banks must pay the Fed if they borrow money. However, it’s key to note that the public lending rate adds a profit margin for the bank or lender. This means businesses get an even higher interest percentage than the base Fed rate.

For business owners, this can equate to a more challenging financial situation. Favorable loan terms are harder to get and businesses face a high-cost capital.

With debt at a 22-year high, how can your startup thrive? Here are seven steps to optimize your business when navigating choppy financial times.

Solidify your forecasts. If you need a high-interest debt for your business, your sales forecast must be solid and reliable. You’ll need to make regular monthly payments or at different terms, and if your revenues fall short of your goals, you may need to default. A reliable sales forecast gives a realistic picture of your expected financial performance. This then helps you strategize payment schemes, and sales and marketing efforts.
Don’t skimp on safety and quality. Never sacrifice safety and quality because of poor economic conditions. Once a customer notices that you have taken an expedient shortcut that affects safety and quality, you may lose this customer forever. Customers often have long memories that extend past a recession. Remember: a whopping 91 percent of the time, one bad experience can stop customers from doing business with your company again.
Have a loan period that your company can safely commit to. It’s ideal to base your payment period on an assured amount you can commit to without the risk of a default. A good sales and marketing strategy and a realistic forecast are your allies on this front. These factors will help you structure your loan so it’s payable even on the low end of those forecasts.
Cut down on unnecessary expenses. Are you still serving high-end food in your cafeteria? Do you have perks that are not required by law for your employees? It’s easy to miss accessory line items just because you’re used to spending on them. But these expenses could now be bleeding your balance sheet dry. Remember: water could be inconsequential, but too much of it has sunk even the mightiest ships. Be ruthless when cutting non-core expenses that don’t serve the bottom line.
Negotiate favorable terms with suppliers and customers. Communicating with your supplier and customers will also be crucial. The goal is to settle on mutually favorable terms which mitigate the financial impacts for all parties involved. While some terms are non-negotiable, an open dialog will still go a long way in saving money without impacting quality and safety.
Talk to your employees about the reality. Transparent communication is also key within your organization. For example, if you are forced to implement a temporary pay cut, your team has to know the whys and hows of it. Comprises might be inevitable, but they should be fair and transparent. Obviously, if a benefit is guaranteed by law, then it is a non-negotiable. But if a perk is specific to your business, consider the cost-benefit value of that expense. If the benefit is much greater than the cost, then you may want to keep it to prevent employee departures. But if there is a common agreement that you can do away with certain expenses, then do so.
Be the voice of encouragement for your business and staff. Your top responsibility as a leader is taking care of your team. Maintaining morale will be crucial to keep the business running during uncertain times. You shouldn’t lie to your employees, but you shouldn’t discourage them by focusing on cold hard facts either. During challenging times, an effective leader is realistic but also staunch in rallying a team together. Be grounded on the present circumstance. But at the same time, stand by your employees and show that you are all in this together.