If, as an entrepreneur, you haven’t been following the conversations and monitoring the rise in interest rates at least in the past year or two, you most definitely have been “sleeping at the switch.” The Bank of Canada increases the interest rate to manage inflation. The central bank raised interest rates seven times in 2022 and has hiked the rates thrice this year.
Although inflation rates have been gradually stabilizing and are now at 3.3 percent (down from a peak of 8.1 percent in June 2022), they are still higher than the central bank’s target of 2%. Economic experts have been non-unanimous in their predictions of another interest rate hike in September.
Black entrepreneurs in Canada know the unique challenges that can arise on their business journey. However, one challenge that can affect entrepreneurs of all backgrounds is the rise in interest rates. In Canada, as in many other nations, changes in interest rates can have far-reaching effects on businesses. Entrepreneurs must understand the relationship between interest rates, inflation, and business dynamics.
Understanding the Impact
One of the most immediate impacts of rising interest rates is the increase in the cost of borrowing. The cost of borrowing increases as the interest rates continue to rise, especially for borrowers with variable-rate loans or those considering new loans, such as mortgages, business loans or personal loans. Higher interest rates mean higher monthly repayments. The increase in borrowing cost can impact the ability to access funding, strain business and household budgets and limit disposable income for other essential expenses.
As we all know, a lack of funding, either debt, equity or grant, can slow down business expansion plans and increase the financial strain on any company.
Although mortgage interest rates have contributed to the rising cost of living, other factors, such as high grocery prices (which increased by 9% year-over-year in May), also play a role.
Adapting to the Changes
Canadian households have demonstrated resilience in the face of economic fluctuations. Despite concerns about making mortgage payments on time, the number of mortgages in arrears has remained low, reflecting the financial stability of many households. To cope with higher mortgage rates, many Canadians are opting for shorter-term fixed-rate mortgages and extending amortization periods to reduce monthly costs. This mortgage shift reflects the expectation that interest rates will fall within the next few years. The preference for longer-term fixed-rate mortgages has shifted, with terms between one and five years becoming more popular than the previously preferred five-year terms.
Navigating the Challenges
While the impact of rising interest rates on borrowers can be significant, there are strategies to mitigate these challenges:
1. Refinance: Consider refinancing existing loans to secure lower interest rates, especially for fixed-rate loans.
2. Debt Management: Prioritize high-interest debts, such as credit card balances, to minimize the long-term impact of interest rate hikes on your finances.
3. Budgeting: Create a comprehensive budget that accounts for higher borrowing costs. Identify areas where you can cut discretionary spending to allocate more resources toward debt repayment.
4. Fixed-Rate Loans: Opt for fixed-rate loans, when possible, as they provide predictability in monthly payments and protect you from future interest rate hikes.
5. Savings Prioritization: Maintain a focus on building an emergency fund and saving for future goals, even during rising interest rate periods.
6. Financial Advice: Seek advice from financial advisors or experts who can provide tailored guidance based on your circumstances.