As global economies work to tame inflationary pressures, central banks—most notably the U.S. Federal Reserve—have employed one of their most effective tools: interest rate hikes. While these increases aim to cool inflation, they send ripple effects through the financial system, particularly the commercial lending sector.
For both borrowers and lenders, the era of easy money is over. The shift to a higher interest rate environment has reshaped risk assessments, tightened credit conditions, and altered the structure of commercial loans. Businesses that once counted on historically low borrowing costs now face a new set of financial realities.
Rising Interest Rates: A New Lending Landscape
Interest rates influence the cost of capital, loan availability, and investor appetite. In the commercial lending space, rate hikes don’t just raise monthly payments—they transform deal feasibility and borrower behavior.
Borrowers and lenders alike must adjust their strategies in real-time to navigate this evolving landscape.
How Borrowers Are Affected
For businesses seeking growth, expansion, or liquidity, rising interest rates can be a serious hurdle. The cost of capital has increased, which often leads to tighter margins and delays in capital-intensive projects.
Key Challenges Facing Borrowers:
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Higher Debt Service Payments: Rising rates increase monthly loan obligations, impacting cash flow and overall financial flexibility.
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Reduced Loan Sizes: Tighter underwriting and lower debt service coverage ratios (DSCRs) can limit the loan amounts businesses qualify for.
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Decreased Internal Rate of Return (IRR): Projects that once generated healthy returns may now fall below investor benchmarks.
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Refinancing Pressure: Loans coming due may face refinancing at significantly higher rates, potentially creating financial stress or default risk.
Sectors like commercial real estate, hospitality, and manufacturing—where project funding often exceeds several million dollars—are particularly sensitive to rate hikes.
How Lenders Are Responding
Lenders are also recalibrating their approach. With increased market volatility and borrower risk, they’re tightening credit policies, reassessing asset valuations, and diversifying portfolios.
Key Shifts in Lending Strategy:
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Stricter Credit Evaluations: Lenders are placing greater emphasis on financial stability, historical cash flow, and recession resilience.
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Lower Loan-to-Value (LTV) Ratios: To protect against declining asset values, LTV thresholds are being reduced, requiring borrowers to inject more equity.
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Shift Toward Fixed-Rate Lending: Borrowers concerned about further rate hikes are demanding fixed-rate options, prompting lenders to adjust their product mix.
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Risk Diversification: Many institutions are shifting away from volatile sectors (e.g., office real estate) and exploring more stable industries like logistics, healthcare, and energy infrastructure.
Strategic Solutions for Borrowers
In this environment, it’s not enough to simply seek capital—businesses must be strategic in how they structure and time their financing.
Actionable Strategies Include:
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Locking in Fixed-Rate Loans: With the future of rate policy uncertain, fixed-rate loans offer protection against further increases.
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Short-Term Bridge or Mezzanine Financing: These structures can help fund projects now while delaying long-term financing until rates stabilize.
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Refinancing Early: Businesses with expiring loans in the next 12–18 months should explore refinancing now, before rates increase further.
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Alternative Capital Sources: Non-bank lenders, private credit firms, and asset-based lenders may offer more flexible terms—often trading higher costs for speed and accessibility.
Additionally, working with an experienced lending partner like Tikal Funding can help borrowers identify solutions that traditional institutions may overlook.
Final Thoughts: Resilience Through Financial Strategy
While rising interest rates introduce new challenges, they also open the door to smarter, more resilient financial planning. Successful borrowers in today’s climate aren’t necessarily the largest or most well-capitalized—they’re the most adaptable.
At Tikal Funding, LLC, we understand that each business has unique needs. Our team works closely with borrowers to structure financing solutions that make sense in today’s rate environment—balancing risk, timing, and long-term goals.
Let’s talk. Whether you’re planning your next real estate acquisition, seeking to refinance existing debt, or just looking for guidance, Tikal Funding is here to help you navigate the path forward.
