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Report On Business Interest-rate hikes require a nimble approach to financing for small business

‘Having diversity in your borrowing is good,’ says Paul Cudmore of Team Eagle Ltd., which provides airport maintenance and operations services.

Although it has operated in a low-interest-rate environment for years, Team Eagle Ltd. hasn't taken anything for granted.

With rates now rising as it expands into new products and markets, the airport equipment and technology company in Campbellford, Ont., has multiple financing options and strategies up its sleeve.

"You can't influence the interest rate, so you have to deal with it," says Paul Cudmore, general manager and chief operating officer of the firm, which has 44 employees and provides airport maintenance and operations services, from snow-removal equipment to safety-monitoring software. It is expanding overseas and shifting into new areas such as airfield-surface condition reporting.

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"Growth is expensive," says Mr. Cudmore.

His company's "creative financing" includes conventional sources such as a major chartered bank and a line of credit, as well as the Business Development Bank of Canada, which finances some of its research and development. "It's a combination strategy," he says.

BDC, which has also helped the company review its business model, offers flexible repayment terms, longer amortization periods and capital payment "holidays."

Rising interest rates will bring about a "change of mindset" for many small businesses, says Ted Mallett, vice-president and chief economist for the Canadian Federation of Independent Business. Entrepreneurs have not had to think about financing rates for some time, but they've never really gone away, he says. "It has never been a question of if interest rates will rise, it's a question of when."

In the future, companies making capital purchases will need to pay more attention to the productive capacity of a piece of equipment or technology, Mr. Mallett says.

"What is the actual payoff? You've going to have to be a little more careful with calculations so you're not buying products and paying more for them and not getting the value."

Companies should review their terms and lines of credit, he says. "It's always a good idea for business owners to be careful and clear in their communications with lenders." Alternatives such as online loans are an option, Mr. Mallett adds, but "it's not as easy as being able to chat with your friend the bank manager or the loan manager."

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Many small companies finance their operations out of personal borrowing, for example leveraging their homes in the Greater Toronto Area and other hot real-estate markets. But this can be tricky, says Richard Rivard, a small business consultant in Toronto, with interest rates rising and business owners facing other issues such as rising minimum wages and changing tax rules.

Mr. Rivard says many of his clients have cash-flow contingencies available in lines of credit to cushion the ups and downs. Borrowers should "shop around your lending agreements and see who can give you the best rate at any given time."

Pierre Cléroux, chief economist at BDC, says the No. 1 thing small businesses should consider doing is locking in a rate.

Many owners have coasted along with flexible rates and now are wondering whether to choose fixed instead. With the point spread between the two recently increasing, "the answer is not that clear now," he says, but borrowers should follow the situation "and as soon as you can see the spread getting smaller, you should think seriously about having a fixed rate."

Companies should evaluate their debt-to-asset ratios, which are typically low for small businesses, compared with consumers, although startups are often financed through personal loans "and obviously that is going to have an impact," Mr. Cléroux says.

Among the businesses most vulnerable to interest-rate increases are younger and smaller firms, high-growth companies that use leverage, technology firms, the restaurant industry and companies with fewer tangible assets.

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Mr. Cléroux says this is a good time for entrepreneurs to evaluate their business plans, especially their strategies to invest in new equipment or technology. "Hopefully the fact that interest rates are rising is not going to change that," he says.

He also points out that businesses today have more financing options. "There's a lot of new money in the market," he says. Private banks are "quite open for business," and fintech firms are providing short-term, riskier loans for relatively small amounts. "That option didn't exist five years ago."

BDC, which has 49,000 clients across the country, also works with entrepreneurs who are considered high-risk; they might need flexible repayment schedules, for instance. It can play a complementary role to traditional banks, too – BDC often co-lends to small businesses along with chartered banks.

Rising interest rates are coming hand-in-hand with the healthier Canadian dollar, which is "going to be more challenging" for companies that export to the United States, Mr. Cléroux adds. "To have a business today is much more complex, because a lot of things are changing at the same time."

Mr. Cudmore notes that small businesses can consider other financing strategies; for example, exporters can qualify for accounts-receivable insurance from Export Development Canada.

"You should always ask for better interest rates," he adds. "And having diversity in your borrowing is good."

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