How Falling Rates May Affect Your Business’ Bottom

Canada has come out the other side of a sustained period of rising interest rates. Your business made it through, thanks to strategies that helped to protect your bottom line. Now that rates are beginning to ease, it’s time to reevaluate key aspects of your business – your cashflow, your debt and your pricing, to name a few. While many business owners are still taking a wait-and-see approach, it’s worth preparing today for what 2025 will bring.

Inflation and rates are coming down – but they remain comparatively high

According to the latest BOC Quarterly Outlook, inflation still has a firm grip on businesses and consumers alike, weighing heavily on consumers’ budgets. And, despite recent cuts, interest rates remain relatively high compared to historical levels. The cost of borrowing and the cost of goods remains more expensive than before.

While business conditions remain muted, there are a couple of positive signs: Subdued demand has allowed capacity pressure to ease, allowing businesses to comfortably meet demand. And sales expectations have improved slightly due to recent interest rate decreases and the anticipation of further cuts.

As the flip of the calendar to 2025 approaches, small businesses should consider how lower rates and will affect their financial planning into the new year.

Five considerations for business owners to make the most of today’s interest rate environment

1. Reevaluate where your savings are parked

High Interest Savings Accounts and GICs were popular places to park excess cash while interest rates were high. As rates on those vehicles have come down recently, they may not be the best options for optimizing your savings. Instead, look for savings and investment options that offer the potential for higher returns, while also matching your risk profile. If GICs are still appealing to you for the security they offer, consider either preserving the higher rate that you might be achieving now by extending/locking in or, for new GIC’s consider choosing shorter terms that allow you to be more flexible to respond to market changes.

Diversification is always a best practice and remains so today – spreading out your cash into different savings vehicles can enable you to preserve, protect and grow your money with limited risk.

2. Assess your debt and financing needs

Lowering rates spell relief for borrowers with variable-rate loans, as lowering rates mean paying less interest on outstanding debt. And while there are indications from the Bank of Canada that rates will continue to come down, predicting the economy’s next moves can be dangerous. It’s still wise to avoid overborrowing, no matter what rates are doing.

If you have a large purchase to make, or you’re considering borrowing to grow, it’s best to weigh the cost of borrowing against the cost of using your capital. If you do decide to take on new debt, again look for flexible solutions that let you lock in if rates go down but leave the door open to a strategy change if they go up.

As a next step, take a look at your Debt Service Coverage Ratio, which can help you determine whether you’re in good financial shape to take on new loans in the new year.

To calculate DSCR, divide net operating income by debt service, which is the sum of all current debts, including principal and interest.

3. Focus on what you can control

As a business owner, there is a lot that’s simply beyond your control. From interest rate fluctuations to geopolitical conflicts to potential changes to the U.S./Canada economic relationship, the year ahead is sure to prove the old adage true: The only constant is change.

So how do you set your business up for success? You focus on controlling what you can influence – namely, your level of preparedness for a variety of scenarios.

Business scenario planning is a crucial step for business owners. Often called “what if planning,” it involves making assumptions on what the future will bring – and determining how these situations, or scenarios, will affect your business.

For instance:

• What if interest rates rose by over 3% in a year? What if they fell by 3%?

• What if you lost half your clients?

• What if the U.S. imposes steep tariffs on your exports?

• What if your biggest supplier didn’t pay you on time?

Scenario planning lets you see alternative versions of your future business, giving you the opportunity to detect potential pitfalls or cash gaps before they happen. It can also stress test your plans against a variety of situations.

Learn how to prepare for the what-ifs of the year ahead: RBC Small Business Talks: Incorporating Scenario Planning into your Business Plan

It’s also important to remember that financing is just one path to growth – there are other ways to tap into funding opportunities that aren’t as closely tied to the economy, including non-repayable government grants that can help you expand, create jobs, advance innovation, launch environmental initiatives and more. GrantMatch can help you find and secure government funding.

There are further opportunities for Black entrepreneurs through the RBC Black Entrepreneurship Program and for young business owners through Futurpreneur.

4. Understand your target market’s response to the economy

The Bank of Canada is seeing indications of improved demand as the pace of price increases have slowed, and credit conditions have become more favourable.

Still, many consumers are feeling the pinch and have opted for cheaper options, especially for discretionary items.

Recognizing where your offering fits within the consumer mindset – and whether your customers are likely to spend more or less on what you sell – can help you establish your pricing, inventory and staffing strategies for the year ahead.

5. Get ready to get off the sidelines

If you’re still adopting a wait-and-see approach, that’s fine – after all, the economy remains in flux and it’s unclear how recent changes to the political landscape south of the border will affect Canadian businesses. As you remain in a sideline position, however, be sure to get your ducks in a row so you’re ready to seize opportunity when the time is right.

This includes:

• Getting your business plan up to date:

  Try the free RBC Business Plan Builder Tool to help you get started on your 2025 plan

• Reviewing your books:

  It may be worth connecting with an accountant to ensure your financials are in order – especially if you’ll be looking to borrow in 2025

• Benchmarking your business with ratios:

  Ratios can help you can help you evaluate the performance of your business and identify potential pitfalls

  Current RatioCurrent Ratio

  Also called Working Capital Ratio, this calculation indicates whether your business has enough cash flow to meet your short-term obligations, act on opportunities and look good in the eyes of potential lenders. It can also help you avoid cash flow problems before they surface.

  How to calculate Current Ratio How to calculate Current Ratio

  Divide your current assets by your current liabilities. Ideally, your Current Ratio should fall between 1.5 and 2 — a ratio of 1 means you may not have enough money to last the year, while a ratio of more than 2 could mean you’re not investing enough into your business for the future.

  Debt RatioDebt Ratio

  Your Debt Ratio shows the percentage of your business’ assets financed by creditors. It’s a ratio a lender will look at before lending money to your business, so it’s wise to know this number before planning the year ahead.

  How to calculate Debt RatioHow to calculate Debt Ratio

  Divide your total debt by your total assets. A good Debt Ratio largely depends on your industry, but anything below 0.3 is considered fair. With anything above 0.6, it may be difficult to obtain additional loans.

  Gross Profit MarginGross Profit Margin

  This calculation shows you what percentage of your income is profit after paying for the cost of doing business. These costs include labour, materials and other production costs. While it can help you assess your company’s financial health, it’s best used to track your company’s performance over time or benchmark your business against companies in the same industry.

  How to calculate Gross Profit MarginHow to calculate Gross Profit Margin

  Subtract your expenses/cost of goods sold from your net sales (gross revenues minus returns, allowances and discounts). Then, divide that number by your net revenues and multiply by 100% to calculate the gross profit margin ratio.

• Meeting with your financial partner: To identify any gaps or weaknesses in your business you need to shore up in advance of any new borrowing requests.

Canadian businesses and consumers are taking some time to adjust to lowering interest rates, likely feeling cautious after an extended period of inflation and rising rates. Keeping a close eye on the market, your customers and your bottom line, while planning for a variety of scenarios, can help your business make the most of the economic environment – in 2025 and beyond.

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