Last week, the Fed raised interest rates once again (to 5.25%) in an attempt to counter inflation and return inflation rates to the Fed’s target of 2%. Meanwhile, according to the U.S. Chamber ofCommerce, 50% of business are putting off growth plans due to rising interest rates. While it may seem counterintuitive, right now is the right time to maintain a growth mindset. And while it may also seem counterintuitive to take out a business loan in a high-interest rate environment (due to the higher cost of capital), there are advantages to maintaining a growth mindset –especially in these turbulent times – and using credit to drive business growth:
If there is a clear business opportunity that could lead to significant growth, taking out a business loan to fund the business opportunity makes sense even in a high-interest rate environment; especially if the return on investment outweighs the interest payments on the loan. Many businesses use high-interest loans as leverage to accelerate growth or expansion plan, if they anticipate an increase in income that can cover the cost of capital.
There are also tax benefits to taking out a business loan. For example, interest payments are tax deductible, enabling qualifying businesses to write off the interest paid on a business loan, reducing the effective interest rate. This applies to both term loans and lines of credit.
Over the last 18 months, 54% of businesses have consistently rated inflation as their biggest challenge. This is above supply chain issues, revenue and even interest rates. The reality is that inflation is destabilizing cash flow for many businesses and a business loan can provide capital to maintain operation and invest in critical areas during periods of inconsistent cash flow. And from an existential perspective, since high-interest rates are a response to inflation, it might be a good idea to borrower because, in a high-inflation environment, the real value of the money you have to pay back in the future may be less than the value of the money you borrow today (noodle on that one for a moment).
A growth mindset is about being able to rapidly adapt to dynamic situations, embrace challenges, and invest in the future. A growth mindset helps businesses see opportunities where everyone else sees risk– to push forward when others are pulling back. In an uncertain economic environment, you can do two (2) things – you can buckle down and weather the storm; or you can embrace it, lean in, and adapt to changing market conditions. So, who will you be? The 50% that puts off growth plans? Or will you adapt, get creative and position your business for sustained success in a dynamic environment?