During an economic crisis – such as the COVID-19 pandemic – central banks typically drive down interest rates to stimulate the economy. The resulting lower interest rate environment creates both opportunities and challenges for businesses, in part depending on how they’re managing through the crisis.
Eric Yu, RBC Senior Director of Business Accounts shares some insights and tips for business owners. Accounting for the differences in circumstances businesses may be experiencing at this time, Yu offers advice for companies facing hardships and those enjoying stronger financial health.
If your business is facing financial challenges
According to Statistics Canada, over half of small businesses in Canada reported a revenue decrease in 2020 compared with the year before, and even more are facing challenges such as lost collections, increased costs, mounting bills and cash flow issues. Many of these businesses received a liquidity boost thanks to government subsidies – but it’s liquidity that has to be managed carefully.
For these owners, Yu recommends the following:
- Keep cash available for day-to-day operations. “Understand what you need to run your business and keep cash on hand in a Business Deposit Account to cover your immediate expenses,” he suggests.
- Consider parking some cash in short-term GICs. Consider parking excess cash not required for day-to-day operations in short-term investments to help earn a modest return. “If your mindset is one of survival right now, you don’t want to take on risk,” he says. “You can grow your money safely in a short-term investment.”
- Plan for debt repayment. If you’re sitting on some cash because of government subsidies, Yu’s advice is to plan for when you need to repay it. “Some of the support measures have deadlines. If you borrowed money, know when it is coming due and plan appropriately.” With a steepening yield curve, you may have an opportunity to place your excess liquidity into an attractive 1 year or longer GIC rate that will mature just in time for your debt repayment.
Keep in mind, some government programs forgive portions of loans under certain conditions. Be sure you’re aware of the dates and details that may have an impact on your cash flow.
Having an 18-24 month liquidity plan that considers how to divide up your cash can help you maintain access to what you need today, meet your repayment deadlines and preserve funds for the future when the outlook begins to improve.
If your business is financially healthy
For some businesses, there has been opportunity amid the crisis, and revenues have grown with new trends and behaviour. For these businesses, Yu has the following advice:
- Find undervalued investments. “In a low rate environment, you can find opportunity,” Yu says. He further advises managing investments according to a time horizon that works best for your business. “For example, you may want to keep your investments within a 6-month time horizon because that’s when you’ll be writing letters of intent or receiving seed funding,” Yu adds.
- Bucket your cash according to your needs. Further to the above point, Yu suggests dividing up excess liquidity with both immediate needs and future goals in mind. “Consider what you need for your day-to-day operations and keep that in an operating account,” he says.For cash above and beyond those needs, think about how much money you’re prepared to take a risk on, and how much you want to park for future investment opportunities. “Longer-term investments currently have the highest yield – consider keeping some cash in a liquid or short-term investment while you look for longer-term opportunities,” he suggests.
- Access low-interest credit now. With low interest rates comes a low cost of borrowing – and opportunity for businesses forecasting growth in the near-term. “For business owners who are in good credit standing, now is the time to apply for credit,” Yu recommends. “Consider the credit that might be needed in the future, and lock in now while rates are low.”
- Review payment terms with your suppliers. If you’re in a position to pay your suppliers faster for raw materials, they may reward improved payment terms with better pricing, in turn helping you boost your business’ bottom line.
A low-interest rate environment can offer relief for borrowers, encourage consumers to spend more, and potentially offer an opportunity for healthy businesses to fund new projects. During this time, it’s worth assessing how low-interest rates affect your business and determine how to plan out your cash – in the short-term and long-term – to your maximum advantage.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.