Cash flow moves businesses can make in a high-interest-rate environment

Managing cash flow in a high-interest-rate environment is challenging for mid-market businesses. Borrowing money is expensive at the moment and there’s no quick fix that can solve the problem. But there are some strategies that can help reduce the amount your business pays in interest.

Keep reading to learn some actions that minimize costs as you navigate this period of high interest rates.

Why high interest rates hit so hard

The high cost of borrowing money constrains your efforts to grow your business. Most businesses seeking conventional debt are sitting somewhere in the 8-10% range, and that’s not expected to go down anytime soon.

The results of the high rates include businesses dealing with longer backlogs and holding off on investments. There’s real pent-up demand in the marketplace, but confidence to act is low. The cost of money hasn’t been this high in a long time and that’s creating significant market apprehension across industries.

Many businesses are prioritizing cost management over growth

The reality for many businesses right now is that growth has taken a backseat to survival and stability.

If you’re not generating enough new revenue to outpace the cost of capital, cost-cutting may become a strategy, at least for the near term. The cuts may hurt, but it’s important to look hard at excess capacity. Specifically, consider labor costs.

Think about a manufacturer with workers on the shop floor who aren’t operating at full capacity. That’s a luxury the current environment may not support. The same goes for:

• Temporary labor arrangements
• Overtime and second-shift operations
• Excess marketing spend
• Support roles that aren’t tied to critical functions

How to stress-test your debt payments

Before you can manage your debt, you need to understand how rising rates affect your ability to service it.

Think of it like your personal finances. You’ve got income coming in, regular bills to pay and then fixed debts like a mortgage and a car loan. Once you cover operations, do you have enough left over to service your long-term debt?

For businesses, the same equation applies, and it matters because banks are watching.

Many loan agreements include debt service coverage covenants. If you have a variable-rate line of credit and interest rates go up, your debt service payments increase. If that ratio tightens enough, your lender may classify your business as financially stressed.

The move here is to model it out. Take your current variable-rate debt, project what the debt service looks like at today’s rates over the next 12 months and test whether your operating cash flow can still cover it. If you’re approaching a covenant threshold, it’s better to find out now rather than at the next renewal conversation.

Focus on variable-rate loans first

Prioritizing which debt to pay down is one of the most important cash flow decisions you can make right now.

Here’s a common scenario: a business owner has a variable-rate line of credit and a fixed-rate term loan. The term loan has a bigger payment, so instinct says tackle it first. That’s the wrong move.

If the variable rate increases, that debt will cost you more over time. The adjustments create exposure that the fixed-rate loan simply doesn’t. In contrast, that fixed-rate term loan is probably locked in at a lower rate than anything you’d get today, so let it ride and direct extra cash toward the variable debt first.

Working capital under pressure: What you’re actually dealing with

Working capital can come from three places: debt, equity or income. In this environment, the income side is what most businesses are leaning on, but it’s not guaranteed to be enough.

If your business is in a growth phase and needs capital to fund a job before invoices come in, you’re in a particularly tight spot. Consider a manufacturer that needs to stock up on inventory for a project invoicing in six months. They need working capital well before the revenue hits their bank account.

If your only solution is borrowing money, here’s how that can go wrong: you borrow on a line of credit and take a 2-3% margin hit from interest costs. If your margin was already tight, say 10-12%, you may find yourself barely breaking even on the job. Or worse, going in the hole. Most businesses don’t fail outright in that scenario. They just quietly erode margins over time.

Alternative capital sources worth considering

If you’ve exhausted conventional lending options or you just don’t want to commit to high rates, there are alternatives. None of them are perfect, but they may be preferable to what’s available through traditional banks right now.

Asset-based lending

If you or other business owners have substantial investment portfolios, some lenders will use those as collateral. You might pick up a point or two in rate savings. The tradeoff is often a personal guarantee, which introduces personal financial risk that not everyone is comfortable with.

Internal capital raises

This means shareholders putting their own money into the business to fund their needs. It’s not appealing, but it can be meaningfully cheaper than going to a bank. When rates were 3-5%, most business owners preferred bank debt because it was cheap and didn’t require tapping personal assets. That calculus has changed.

Shareholder debt

This is when a shareholder lends money directly to the business. The interest payments flow back to the shareholder, creating a tax deduction for the business and potentially benefiting the lender personally. There’s also a structural advantage: shareholder loans create a tax basis within the entity, potentially allowing losses to be deducted in the current period. Bank debt doesn’t create that basis, meaning those losses could sit locked inside the business until future gains release them. Tax planning is complicated and requires thorough examination, but this is a strategy to consider.

The downside is that shareholders must come up with the cash themselves to make it work.

Related-party lending

Borrowing from family members or related parties is subject to applicable federal minimum rates, which can be substantially lower than market rates, potentially in the 2-4% range. The obvious downside is you’re beholden to a family member and that comes with its own complexity.

Paying cash for capital expenditures

When the tax advantages of financing equipment no longer outweigh the interest cost, paying cash starts to make more sense. The acceleration of tax benefits in year one via bonus depreciation can be compelling, but when interest is eating into that advantage, an outright cash purchase may be the cleaner play if you have the capital to support it.

Taking on a new partner or shareholder

This option should be a last resort for a growing business. Yes, you get capital. But you’re giving up a permanent share of future upside. If your business is positioned for growth, that’s an expensive trade over the long term. Once that equity is gone, you may not be able to get it back.

None of these alternatives are ideal. But understanding the full range of options and the real trade-offs of each can be the difference between reactive decision-making and a deliberate financial strategy.

Read more

• Financial scenario planning isn’t optional: How to stress-test your capital strategy
• Capital allocation strategy: A guide to help CFOs establish funding priorities
• Why cash flow visibility is becoming a leadership issue