High interest rates aren’t the ideal scenario for those in the home improvement industry. As rates rise, projects can get more expensive and take longer to complete. Of course, that doesn’t mean that there aren’t things you can do to deal with these changes. With the right strategies and tools, you can protect your home improvement business from the worst effects of high interest rates.
In this blog, we’ll talk about why interest rates rise, how it can affect your industry, and how you can roll with the punches. Read on below to learn more.
Why Does the Fed Raise or Lower Interest Rates?
A primary role of the Federal Reserve is to keep the economy, or the price of buying things, stable. One of the tools it has to do this is raising or lowering interest rates to change the price of borrowing. When inflation is running rampant, the Fed tends to increase interest rates to slow down demand and spending.
Of course, this isn’t a perfect solution. When the Fed makes changes like this, it can have lasting effects on the economy, and some industries may struggle more than others. This is especially true if your industry is dependent on customers being able to borrow money or if you borrow money to fund projects yourself.
Eventually, the Fed will lower rates again when it believes economic factors indicate that borrowing and spending need to increase. Until then, the interest rates continue to rise, and these industries will need to plan for the near future. With the right strategy, you can make sure you keep a steady flow of business and offset the effects of these rising rates.
Before talking strategy, let’s look at some of the ways interest rates can affect the home improvement industry or your business specifically.
How Do Higher Rates Affect This Industry?
Higher interest rates affect the home improvement industry in several key ways. It’s not all doom and gloom, but there are certainly preferable scenarios for those who make their money through home improvement.
Housing Production Slows
New housing construction likely slows down dramatically. The cost of borrowing makes taking out a mortgage much less appealing, meaning that homeowners will lean toward making improvements to their current home, investing in a fixer-upper, or finding a home they can make perfect through renovations.
While this isn’t ideal for new construction companies, home improvement businesses may find that they’re able to leverage this and bring in more business.
This is especially the case considering that skilled workers are in shorter supply, meaning demand for quality home improvement businesses may be greater. This is bad news for homeowners who want to find a skilled company quickly, but it’s good news for those who can line up a lot of business for the near future.
Home Renovation and Repair Projects Become Expensive
The increased cost of borrowing combined with inflation makes construction projects a more financially significant undertaking. Home renovation and even repairs are more expensive than usual, thanks to the increase in material costs. Home renovation and construction companies have also needed to raise their rates to keep up with their increased overhead, meaning any type of construction project is going to be more expensive in general.
Material Costs Increase
As we mentioned, the materials needed for renovations and construction have not avoided inflation. Lumber, steel, paint, screws, drywall, and nearly every other necessary material is more expensive than it normally is.
The increased cost of materials isn’t the only issue either. The effects of the pandemic continue to be felt, with the supply chain still disrupted. Not only are companies struggling to pay for the higher-cost materials, but the materials are also being delayed and are taking longer to get.
It may be a while before home improvement and construction companies are able to lower their rates, because the price of materials may continue to fluctuate in the near future. Changing prices is inconvenient enough without having to do it multiple times.
Loans Are More Difficult To Get
To state the obvious, higher interest rates are making it more difficult for people to take out loans. Whether you’re paying for a home improvement project or new construction, a loan is usually necessary. But the price of taking out a loan isn’t the only obstacle, as lenders are also more selective about who gets to borrow.
With the higher cost of improvements and construction, people have to take out a larger loan than they usually would need. This larger loan amount also costs more thanks to the increased interest rates, meaning there’s a higher risk that the borrower could default on the loan. This means that lenders may have extra measures and stipulations in place, which makes taking a loan out even more unappealing.
These same problems extend to contractors and home improvement businesses that are taking out loans for their business needs. In short, everything is more expensive for everyone—at least for the time being.
Protecting Your Business From the Effects of High Interest Rates
Naturally, the next question is what can you do about high interest rates? Fortunately, there are several ways to protect your business from the effects of these interest rates and keep things as stable as possible until the Fed decides to bring interest rates down and inflation evens out. Some of the best tactics are to lay out a comprehensive cash management strategy, make smart borrowing decisions, and invest in tools that will help make things easier for your customers.
Let’s take a look at some of these strategies.
Understand Your Cash Management Strategy
First and foremost, it’s a good idea to take an in-depth look into your finances and how you do business. What was working well before may not be working so well anymore. It’s good to have a well-defined but flexible cash management strategy in place. This will help you keep cash flowing through the business, reduce your accounts payable and receivable bottlenecks, and ensure your cash is being used in the right way.
Here are some quick tips for adjusting your cash management strategy:
- Get a comprehensive look at your cash flow: Before you can fix anything, you need to have a good understanding of how it all fits together. Make sure you have a good system in place for tracking your cash flow and that you know how much is going in and out. Once you have a handle on that, you can take the next important step.
- Cut costs: With a comprehensive overview of your cash flow, you can cut out unnecessary costs and inefficiencies. Even if the results aren’t significant, saving money is never a bad thing.
- Create better cash flow terms: During this time, it’s important to ensure your accounts receivable are in order. If you can, offer options for faster payments. You could even provide incentives for customers who are able to pay sooner. The same goes for your accounts payable. See if you’re able to hold off on paying so you can keep more cash on hand and schedule your payments in a way that’s beneficial for your cash flow.
Invest In a Solution to Offer Your Customers Competitive Financing
A great way to protect your business is to make sure you’re offering your customers solutions to combat the effects of high interest rates. Everyone who needs to borrow money or finance their projects is hurting, so offering your customers competitive financing options could be the solution they need to go with you over competitors.
With a tool like Hearth, you can offer competitive financing options that help you win more jobs and save your clients from sticker shock. Hearth gives you options like affordable monthly payments without prepayment penalties. This gives your customers flexible options that work better for them, and it may even get you paid earlier.
In other words, customers will have a clearer understanding of their buying power, making them feel more comfortable when they want to start a project. Pre-qualified customers will get to see their options and how much they can afford. This helps you get the most out of each project and helps your customers request the projects the way they want them.
Get Started Today!
Be sure you’re equipped with the tools you need to make things easier for yourself and for your customers. In addition to offering better financing options for your customers, Hearth lets you collect and send payments, get quotes to customers, automate invoicing processes, send payment reminders, and more.
Hearth not only gives you the tools you need to win more business but also gives you the tools you need to get paid as quickly as possible while making things convenient and seamless for your customers.
Ready to get started? Sign up for a demo today!
