Three ways to combat rising interest rates
It’s easy to dismiss the effect that small changes can have on your business, but small changes really can add up and have a positive effect on your business’s bottom line. Switching to energy-saving light bulbs is one bright idea to save money. And, with likely interest rate increases on the horizon, finding ways to beat higher interest rates is another.
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Deposit payments straight away
Get into the habit of depositing payments straight away. Cash sitting in your till drawer or cheque payments waiting to be deposited aren’t working for your business. But once in your bank account, these amounts can either reduce your overdraft and save you interest charges, or add to your bank balance and earn you interest.
You could also save time and money by encouraging electronic transfers directly into your bank account, to really maximise this interest payment-saving opportunity.
Improve your debt collection
Follow up on payments as soon as they fall due. A friendly follow-up call should reduce the amount of time you wait to get paid, and reduce the period you effectively provide interest-free loans to your customers while paying interest on the money you’ve borrowed. If you receive payment sooner, you can reduce your overdraft and effectively reduce the amount of interest you’ll have to pay.
Another way to encourage prompt payment is to offer customers an early settlement discount, such as a 2.5% discount for payment within 30 days or 5% for payment on delivery. Find out more about setting your terms of payment and managing debtors.
Manage your purchases and payments
Most small businesses have a lot of money tied up in stock. If you’re able to reduce this by managing your purchases better, you can reduce the amount of money you borrow and the interest charges you’ll have to pay.
A manufacturer can reduce stock levels by using just-in-time ordering with parts or raw materials delivered a week before they’re needed, rather than months before. A retailer can use a similar approach by reducing store stock levels and drawing on supplier’s stock after each sale.
Talk to your suppliers about your requirements and help them to anticipate your stock needs. They should be able to provide you with an efficient stock servicing solution that allows you to reduce your stock levels, as well as the amount you’ve borrowed to pay for the stock and the interest you’d pay on the money borrowed.
You can also use your supplier’s terms of payment to your advantage. If you have credit terms from your supplier, you have access to non-interest bearing credit. Use this as much as possible, and ask for favourable terms from other suppliers to reduce the amount of interest-bearing money you need to borrow, and the amount of interest you need to pay.
The amount you’ll be able to save by introducing these small changes into your business could add up to significant savings over a year or two.
