The High-Interest Economy: Strategic Considerations For Business Leaders

Key Summary

• The era of cheap, debt-fueled growth has ended with the Federal Reserve's rapid interest rate hikes, forcing businesses to prioritize capital cost optimization and debt management for resilience.
• Companies must now meticulously assess and optimize their organizational debt by identifying high-cost liabilities, revisiting their capital structure, and leveraging their strong financial standing to secure better borrowing terms.
• Beyond financial strategies, operational efficiency and talent retention become crucial, as businesses need to rigorously evaluate capital expenditures for immediate ROI and view investing in their workforce as a long-term asset.

For about a decade, businesses operated in a near-zero interest rate environment, making capital cheap and encouraging debt-fueled growth. This era normalized high-leverage models where the cost of borrowing felt negligible. Then came the shock of 2022, as the Federal Reserve rapidly raised rates to combat inflation. While these moves are designed to cool the broader economy, they fundamentally change the financial calculus for every business leader.

In today's higher-rate environment, the margin for error is shrinking. Strategic financial management isn't just about pursuing growth; it's about optimizing the cost of capital and proactively managing organizational debt to ensure business resilience and maintain competitive advantage. Leaders who fail to adapt to higher interest rates risk being squeezed by rising debt service costs, which can cripple innovation and operational budgets.

As the founder of a financial technology firm providing entrepreneurs with access to credit, here's what I suggest businesses keep in mind.

1. Assessing and Optimizing Organizational Debt

High-cost, short-term liabilities can limit a company's ability to invest in core business activities. Business leaders should view organizational debt not as a monolith, but as a spectrum of risk and cost requiring continuous, granular management.

I recommend conducting a thorough review of your company's outstanding debt, such as traditional bank loans, revolving lines of credit, corporate bonds and even hidden organizational debt like high-interest vendor financing or late-payment penalties. Identify which debt instruments carry the highest effective annual interest rate. Then:

Prioritize costly obligations. Every percentage point difference in the cost of debt can be a direct drag on profitability. Implement a corporate debt-reduction strategy. For instance, some organizations choose to prioritize retiring the highest-cost debt first.

Revisit capital structure. With a higher baseline for borrowing, businesses can also consider reevaluating their capital structure. Does your organization rely heavily on debt? Companies may explore options such as equity financing, retained earnings or strategically managing internal cash flow to help fund growth projects. This can help reduce exposure to volatile interest rate markets.

2. Leveraging Your Financial Standing For Better Terms

A company's financial health dictates its cost of borrowing. When facing higher interest rates, maintaining an impeccable business credit profile and strong balance sheet is a non-negotiable competitive advantage. A strong profile may translate into better interest rates and more flexible covenants, which can help safeguard future access to capital.

Establish a flawless payment history. Business credit bureaus heavily weigh a company's history of paying vendor invoices, utility bills and trade credit accounts. Ensure all business obligations are paid consistently and on time. This forms the bedrock of a favorable business credit report, which is usually the first document reviewed by any commercial lender.

Proactively manage trade credit. I've found that trade credit from suppliers is often overlooked but can be a surprisingly high-cost form of short-term financing if managed poorly. Leaders can try to negotiate favorable payment terms and rigorously enforce internal controls to maximize discounts. Building trust with mission-critical suppliers could allow for the negotiation of longer, more flexible terms, which may also reduce the need for external, high-interest working capital loans.

Consider diversifying lending relationships. Cultivating relationships with multiple financial institutions — such as community banks, credit unions and specialized commercial lenders — creates competition for your business. When capital is needed, this diversification can help your business secure the best possible terms and avoid being captive to a single high-rate offer.

3. Operational Efficiency and Talent Retention

The burden of high-interest rates extends beyond the balance sheet; it infiltrates day-to-day operations and impacts long-term strategy. With capital being more expensive, investments in internal efficiency should provide an immediate, verifiable return on investment.

Fundamentally review capital expenditures (CapEx). Every major equipment purchase, infrastructure upgrade or real estate acquisition should now pass a higher hurdle rate. Where low rates might allow for "nice-to-have" CapEx, I believe high rates mean that every dollar spent on fixed assets should demonstrate an accelerated path to profitability or cost savings. Companies can consider prioritizing productivity-enhancing investments (e.g., automation software or lean manufacturing tools) that directly reduce long-term operational costs. This can help offset the higher cost of the capital used to purchase them.

View talent as a capital asset. In the knowledge economy, talent is often the most critical capital expenditure. High-rate environments often lead to cost-cutting, but business leaders must be surgical. In my experience, investing in the retention and upskilling of high-performing employees is cheaper than the high cost of recruiting and onboarding new staff. Treat talent investment as a long-term asset, and protect key teams from budgetary freezes to ensure sustained innovation.

4. Financial Innovation as a Business Opportunity

The current economic climate, while challenging, creates significant market opportunities for financial entrepreneurs and innovators. Companies specializing in financial technology or advisory services can position themselves as essential navigators for businesses struggling with the high cost of capital.

Optimize business debt restructuring. The increasing strain on small and mid-sized businesses creates a robust demand for expert services focused on corporate debt restructuring, negotiation and optimization. Financial firms that can help businesses renegotiate loan covenants or consolidate high-cost commercial paper can offer immense value.

Develop alternative financing models. I'm finding that many business leaders are actively searching for alternatives to traditional, high-interest bank loans. This is a critical opportunity for fintech platforms to innovate with solutions like asset-backed lending or revenue-based financing that offer flexibility and help companies bypass current high-market interest rates.

Focus on business resiliency and advisory. As a provider of business services, your value proposition in this environment should pivot from merely facilitating growth to ensuring sustainable business resiliency. Offering expertise that helps companies reduce their internal costs of capital and navigate financial complexity is a powerful differentiator that executive audiences are often actively seeking.

The higher interest economy is a lasting strategic shift. For business leaders to successfully navigate this landscape, it's important to treat the cost of capital as a primary strategic priority, relentlessly audit your organizational debt and leverage financial expertise to build more resilient, capital-efficient enterprises.

Connect with an Old National Small Business Banker for more insights to help your business grow.

This article was written by Reco McCambry from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.