With the rising interest rates I have seen companies make 2 common mistakes that are now more costly.
- Not paying down highest interest rates first
- Having excess cash sitting in the bank and not making interest
Companies may take out various equipment loans, lines of credits, car loans, SBA loans, AR factoring, etc. Over the last 20 years it has not been as big of a deal since most of the interest rates were in the 4-6% range, but now I am seeing spreads from 3% – 9% or if factoring or through companies like kabbage it could be as high as 15% – 30% interest. As seasonality and good months come in the company needs to decide what loan to pay down first and often time they may not chose the one with the highest interest rate or even know the different interest rates of their loans.
For example consider multiple 50K loans one of my clients had. that was shown at the start of this article. If they were able to pay off the loan with the higher interest rate then they would save over $2K annually.
The other side of this is if you had $50K in the bank just sitting there you could miss out on $2.4K if you had that money in a money market account. If you had it in CDs you currently could make a little more but would have to tie the cash up for 3 months.
So take a look at your interest rates to see if you could add an extra $2K of profit this year 😊