A few Simple Ways to Reduce the Interest Rate Squeeze

FRIDAY, OCTOBER 21, 2022

There are plenty of complicated decisions to make in today’s environment of rising rates and its resulting impact on stock markets and investment decisions. But some adjustments are straight forward. 

Following an increase of .75 percentage points on September 7, the Bank of Canada's policy rate now sits at 3.25%. With five recent hikes and more on the way, there are a few simple adjustments that business owners and investors should consider:

  1. Put any excess cash into short and long-term interest-bearing accounts

Fixed GIC rates are rising, with banks offering nearly 5% for fixed GICs and cashable GICs approaching 3%. We have advised a number of clients who are continuing to leave cash in non interest bearing accounts to get the money working!

2.     Carry less debt

Following years of free money, debt now has a real cost attached to it. Ensure that you are aggressively paying down any  lines of credit, in particular those that are incurring interest that is non-deductible for income tax purposes .

Also, minimize your use of the line of credit by making sure your business is staying on top of accounts receivable collections and avoiding paying off payables early.

3.     Pay your tax installments and overdue balances

The interest charged by CRA fluctuates each quarter with changes in the prime bank rate – so avoiding unnecessary interest charges is much more important than it was at the beginning of 2022.

4.     Get any necessary financing earlier 

Waiting too long to secure financing may mean settling for higher-cost financing or even potentially not qualifying at all as credit markets tighten. At a minimum, business owners without a line of credit should consider securing one and contemplating whether it makes sense to use these lines instead of term debt to maintain flexibility

5.     Refinance variable-rate loans

Consider refinancing a variable-rate loan with a fixed-rate loan. Despite this rate hike, interest rates overall remain attractive for many types of commercial financing. Now may be a good time to secure a loan with a fixed interest rate and predictable payments. Of course, the facts differ from business to business and this is an item that you should discuss with your accountant and banker.

6.     Contemplate discretionary spending

Review your 3 or 5 largest recurring monthly expenditures for interest-bearing items and how you can adjust those favourably. Also consider the alternatives of buying vs leasing assets should such a decision be looming in the near term.

To help review your options under rising interest rates, please contact a member of our team.