545: The Implications Of Rising Interest Rates For Construction Contractors

This Podcast Is Episode 545, And It's About The Implications Of Rising Interest Rates For Construction Contractors In the construction business world, one constant factor you are likely to encounter is change, particularly in the financial landscape. One such change that can bear significant implications for small businesses is rising interest rates.    Understanding how this impacts your construction business and identifying solutions to counteract these effects can be vital to sustaining and growing your company.   When interest rates go up, borrowing money becomes more expensive. This can impact your ability to make a profit on construction projects. You might have a more challenging time getting financing for new projects and have to pay more for the funding you get. Fewer people may be looking for your construction services when the economy slows due to rising rates.  

Interest rates have a ripple effect on various aspects of business; let's dive deeper:

Decreased consumer spending

A crucial repercussion of rising interest rates is that homeowners invariably allocate more of their income to repay the increased mortgage rates and other loans. As a result, there's less disposable income for them to spend — this isn't great news if you are in an industry deemed non-essential or not a priority by the consumer.

Difficulty in accessing credit

Lenders may enforce stricter requirements, such as more equity or personal guarantees, in response to high business loan rates. This makes long-term and short-term debt more expensive and more complex to obtain.

Increased operational costs

The ripple effect of interest rates can also increase your operational costs. Your employees (if you have any) might demand a pay rise to cope with their increased living costs, and essential business partners might pass on their increased costs to you, raising the price of your whole supply chain.

Uncertainty in predicting future costs

Rising interest rates can make it difficult to predict the cost of future borrowing or the cost of existing business loan rates, making it harder to plan your finances and future investments.

If lenders are not confident of your business viability or see your construction business as high risk, funding debt will cost more, and interest payments will be higher. Because high interest can put added pressure on your cash flow, this will likely worsen your situation.

Your next steps

Regardless of your business's financial challenges, strategies, and resources are always available to help you overcome them.

If you're worried about the rising interest rates, don't stress - plenty of options are available. For instance, you can check out financing options with great rates and terms. It's also always a good idea to have a solid financial plan to help manage any potential impact of rising interest rates.

There are also several strategies you can employ to mitigate its impact:

1. Refinance your debt: If you have an outstanding debt with a high interest rate, consider refinancing it to a lower rate. This can help you save money on interest payments over time. Refinance high-interest products like credit cards.

2. Negotiate with lenders: If you want to take out a new loan, try negotiating with lenders to get a better interest rate. You may get a better deal with a good credit score or a strong business history. Secure new loans with a longer fixed term to protect against further unexpected increases.

3. Increase revenue: One of the best ways to combat rising interest rates is to increase your income. This can help you cover the cost of higher interest payments and keep your business profitable. 

4. Cut costs: Look for ways to cut costs in your business to free up cash flow. Delay major purchases that could drain your cash reserves. This can help you pay down debt and reduce the impact of rising interest rates. Discuss with your suppliers how to work together to offset interest rate increases.

5. Diversify your investments: Consider investing in various assets, such as stocks, bonds, and real estate. This can help you spread out your risk and minimize the impact of rising interest rates on your overall portfolio. 

Evaluate how susceptible your construction company is to the effects of rising interest rates and take action accordingly. Immediate steps can include paying off debts that may incur higher interest costs and investigating any government support you may be entitled to.

In summary

As interest rates rise, business owners in the construction industry may face challenges. Higher interest rates mean borrowing money becomes more expensive, making it harder for business owners to finance their projects. This can also lead to a decrease in consumer spending, which can reduce demand for construction services. 

In addition, rising interest rates can increase the cost of materials and labor, which can further impact the profitability of construction businesses. As a result, it's essential for construction business owners to stay informed about interest rate trends and to be proactive in managing their finances to mitigate any potential negative impacts.

Final thoughts

While nobody knows your contracting business as well as you do, seeking expert financial advice right away is crucial for your survival in economic distress. Contact me for tailored advice so we can navigate the unsteady financial times.

I look forward to chatting with you, and hopefully, it will help you understand your current situation and also help you consider your options, implement concrete action plans, and minimize your exposure to further risk through practical strategies.

Take a deep breath and know that you've got this!

About The Author:

Sharie DeHart, QPA, co-founded Business Consulting And Accounting (Fast Easy Accounting) in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations. She offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com