5 Ways to Prepare for Interest Rate Hikes and Protect Your Company's Bottom Line

By Dean Kaplan

You’ve already heard the bad news. Consumer prices just keep soaring—in fact, they’re rising at the fastest rate in more than 40 years. Service costs have jumped significantly, too.  We’re paying more for everything from dry cleaning to pet sitting to haircuts.

What does rampant inflation mean for the health of your business? Maybe you’re already seeing the effects, especially if you or your customers are involved in real estate. Slowing construction starts and sluggish property sales have created a cascade of downstream effects for companies that sell everything from hardware, lumber, and lighting to furniture, soft goods, and more.

You might imagine that if your business or professional practice isn’t in the real estate sector, everything’s fine. But in truth, virtually all U.S. businesses will suffer in the coming months as the Fed battles to keep the cost of living from soaring even higher.

The triple whammy that’s hitting consumers and businesses alike

Analysts predict the Fed will announce another jumbo-sized interest rate hike, possibly three-quarters of a point, at its November 2 meeting. This is big news for virtually all small-to-medium-sized enterprises in every part of the United States.

In essence, the Fed is actually pulling money out of the economy, reversing the effect of federal subsidies that kept consumer spending relatively healthy during the pandemic. My calculations show that approximately 5% of the country’s GDP will now be absorbed by higher interest expenses, which means consumers and corporations have less to spend on goods and services.

Families and businesses that buy on credit—which means pretty much all of us—are facing a triple whammy as the cost of goods, labor, and money keeps rising. Consumers and corporate borrowers who’ve been straining to meet their obligations for a while now will be pushed into default. This means that some portion of your customer or client base will stop paying on time, which will have a direct effect on your bottom line.

Like most businesses, you may find it hard to predict which customers won’t be able to settle their accounts in full. Even if you had a crystal ball, you might find it hard to restrict credit for customers you suspect might struggle to pay in future months. Doing this would certainly hurt sales and revenues—and your competitors would have a field day welcoming your former customers into the fold.

Prepare for interest rate hikes to protect your business

1. Tighten your credit approval criteria

This is no time to offer easy credit to anyone. Instead, you should take a hard look at your credit approval procedures, revising them to actively filter out customers who pose future payment risks.

For example, if you’ve been lax about investigating an applicant’s financial health before extending credit, close that loophole right now. If a business has struggled to pay other vendors or is too new to have a solid credit history, you might put them on a cash-only basis for the first few months, or offer tighter terms to start.

Watch all new accounts like a hawk until you feel reasonably sure they qualify for better terms, and take rapid action when debtors fall behind (see point #3 below).

2. Align your sales efforts with the new economic realities

When the economy is healthy, your sales team may feel free to grow your customer base without thinking much about a potential client’s creditworthiness. This strategy is fine when all businesses are doing relatively well, and even newer enterprises can steer their way out of temporary lulls to achieve profitability.

In tougher times and when preparing for interest rate hikes, however, your sales team needs to focus on quality, not quantity. This means selling more goods or services to customers who have a proven record of paying on time. New customers are welcome, but make it clear that you will not green-light credit applications as readily as you did before. You may even want to change your compensation strategy for sales associates to align with your company’s need to seek well-qualified customers who not only need the goods and services you offer, but are able to pay on time.

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3. Deal with past-due accounts right away

Taking fast action when customers pay late may be even more important than changing your company’s credit approval procedures. Still, if you’re like most businesses, you probably haven’t paid enough attention to this essential practice.

All economic signs point to a race for the money as creditors push to collect from every struggling customer. Those who take action at the earliest possible moment will have a distinct advantage.

For decades, studies have shown that the longer an invoice goes unpaid, the less likely it is to be collected in full. For example, a six-month-old invoice has a 52% chance of getting paid eventually. At the end of one year, the odds drop to 23%.

4. Give your accounts receivable team the resources they need

It takes time and skill to manage receivables effectively. Your current team may need more people and possibly more training to stay on top of past-due accounts. For example, they may need to use more channels to reach debtors, including social media. They will also need to reach out more often, using a positive approach that helps them gather useful information about each debtor’s situation—the best way to prepare for effective negotiations.

New protocols need to be created for accounts that reach the 30-day and 60-day past due point. Your accounts receivable team may have let accounts go until they hit 90 days, but this no longer makes good business sense. Customers who struggle now may not survive the downturn we know is headed our way. Collecting what you can now is the right strategy, and your team needs solid resources to get the job done.

Build on these practices throughout 2023 to minimize credit defaults

No business or professional practice will find it easy to retool credit and collections practices overnight. Your goal should be to take rapid action on problem accounts, followed by a systematic review of how you’ve handled receivables in the past.

Consider this the starting point of a 12-month campaign to improve the health of your receivables. With all economic signals pointing to rough times ahead, you’ll be glad you did everything possible to prepare for interest rate hikes, minimize default risks, and protect your bottom line.

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