The 'World with Interest Rates' Has Arrived: What Small Business Owners Need to Check Regarding Loans Now

Hello!
T&A Financial Management Co., Ltd. I am Takahiro Saito, the Representative.

At our company, we provide financial consulting to support the ‘money side’ of things—such as bank loans, cash flow, and financial strategy—for executives of small and medium-sized enterprises.
As an external CFO, I walk alongside management while also assisting with bank negotiations and fundraising.

Now, recently, I have heard these voices all at once from clients and in consultation settings.

“Will interest rates keep rising like this?”
“The bank told me they want to raise the interest rate, but do I have no choice but to accept it?”

For a long time, Japanese companies have borrowed money under the assumption that ‘interest rates are almost zero.’
However, that premise has already collapsed.

In this article, I will convey the following three points to small business owners who have loans.

• What is happening with interest rates now, and how will it affect your company?

• What are banks looking at in companies right now?

• What you should do right now to prepare for rising interest rates, and what you must not do

What is happening with interest rates now?

To start with the conclusion, Japan has clearly returned to a ‘world with interest rates.’

The Bank of Japan raised the policy interest rate from 0.75% to 1.0% in June 2026, and just three months later in September, it raised it further to 1.25%.
1.25% is the highest level in about 31 years, since 1995.
Governor Ueda has indicated a policy of continuing to raise interest rates in the future, and although the October meeting resulted in a hold, additional rate hikes are being anticipated toward the end of the year and into next year.

Long-term interest rates are the same.
The yield on newly issued 10-year Japanese government bonds reached the 3% range in September.
This is a figure that will gradually affect fixed-rate home loans and long-term corporate loans with fixed interest rates.

What is troublesome is that the rise in interest rates is not coming ‘in isolation.’
It is surging simultaneously with high prices, rising labor costs, and labor shortages.

According to Tokyo Shoko Research, corporate bankruptcies in the first half of fiscal year 2026 (April–September) totaled 5,373, the highest level in 13 years.
Officials point out that as the effects of rising interest rates and other factors spread, companies without financial strength will be further weeded out.

In other words, the next few years will be a phase where the ‘cost of borrowing’ will create differences in management performance.

How will rising interest rates affect companies?

Many people may not get the point even when they hear that ‘interest rates are rising by 1%.’
So, let’s replace it with concrete numbers.

For example, for a company with 300 million yen in loans, if the interest rate rises by 1%, interest payments will increase by 3 million yen per year.

For those who thought, ‘3 million yen is manageable.’
Try thinking about recovering this 3 million yen through sales.

For a company with an operating profit margin of 5%, you need to increase sales by 60 million yen to earn 3 million yen in profit. If interest rates rise and you do nothing, that amount of profit will simply disappear.

Summarized by borrowing scale, it looks like this (calculated with interest rate +1% and operating profit margin of 5%).

• Borrowing 100 million yen → Interest increases by 1 million yen per year → Sales required to recover: 20 million yen

• Borrowing 300 million yen → Interest increases by 3 million yen per year → Sales required to recover: 60 million yen

• Borrowing 500 million yen → Interest increases by 5 million yen per year → Sales required to recover: 100 million yen

When put into numbers, the weight of rising interest rates becomes tangible, doesn’t it?

There is an ‘order’ to how the impact occurs

Another important point is that not all borrowings are affected at once. The impact generally occurs in the following order.

1. Overdrafts and short-term borrowings: Many are linked to the short-term prime rate, so interest rates rise immediately after a rate hike.

2. Variable-rate long-term borrowings: These rise sequentially at the timing of base rate reviews (e.g., every six months).

3. Fixed-rate long-term borrowings: These do not change during the contract period, but when refinancing or taking out new loans, current interest rate levels are reflected all at once.

It might be too early to feel relieved by saying, ‘We have fixed-rate loans, so we are fine.’ Even fixed-rate loans taken out during the previous low-interest period may see a significant increase in rates when they are refinanced as repayment progresses. In other words, ‘the impact arrives with a time lag.’

What are banks looking at now?

I have experience working on the front lines of corporate lending at a bank. From that perspective, in a phase where interest rates are rising, ‘how a bank views a company’ directly translates into the difference in interest rates.

Interest rates are determined by ‘base rate + spread’

The interest rate a company pays is broadly divided into two parts.

• Base rate: Such as the short-term prime rate or TIBOR. Since these rise in line with the Bank of Japan’s rate hikes, the company cannot change them.

• Spread (additional margin): The portion that the bank decides for each company. There is room for negotiation here.

When determining the spread, banks mainly look at the following two factors.

1. Credit rating: The company’s creditworthiness based on financial statements. Factors such as the equity ratio, debt repayment years, and profit stability come into play.

2. Profitability of transactions: How much profit is being generated from the entire relationship with the bank, including not just loans, but also deposits, payroll transfers, and settlements.

In a phase where interest rates are rising, banks also judge ‘which company to raise rates for, and by how much’ based on these two perspectives.

Interest rates are more likely to rise for ‘companies that are hard to understand’

The most difficult situation for a bank employee is when they ‘don’t really understand what is happening with this company right now.’
They only submit financial statements once a year, and no trial balances or cash flow statements are provided. Such companies are more likely to have their risks estimated on the higher side.

Conversely, banks can confidently offer terms to companies that regularly explain their business performance and future plans.
Even with the same performance, the ‘difference in information disclosure’ becomes the difference in interest rates.

In the era of near-zero interest rates, this difference did not appear much on the surface.
From now on, it will clearly show up in the numbers.

5 measures to take right now

So, what exactly should you do? I have narrowed it down to five things you can start working on today.

① Create a list of borrowings

First, grasp the current situation.
Summarize the following items on a single sheet, by bank and by loan.

• Lender, loan date, initial amount, current balance

• Interest rate, and whether it is fixed or variable (if variable, what is the base rate?)

• Monthly repayment amount and final maturity date

• Presence or absence of guarantees or collateral

Surprisingly, there are many companies where ‘the president themselves does not grasp the whole picture.’
Just by listing them, you can see which loans will have an impact.

② Simulate what happens if interest rates rise

Once the list is complete, simulate ‘how much the annual interest will increase if interest rates rise by +0.5% or +1.0%’.

Put those numbers into your cash flow statement and check how your cash on hand will move.
This will become the basis for judging whether you ‘can endure this much’ or ‘are in danger if you don’t take action early’.

③ Review the balance between fixed and variable interest rates

Companies with many variable-rate loans will be immediately affected by rising interest rates.
On the other hand, fixed interest rates are generally set higher than variable rates at the present time.

There is no single correct answer.
What matters is whether you have a balance that allows your cash flow to function even if interest rates rise.
Consider fixing a portion of your interest rates when taking out new loans or refinancing.

④ Establish a ‘dialogue’ with your bank

It is too late to act after you have been approached about an interest rate hike.
Build a mechanism for dialogue with your bank while you still have time.

• After the fiscal year-end, the president should personally explain the financial results and the outlook for the current term

• Submit trial balance sheets regularly (e.g., every quarter)

• Share cash flow statements and business plans

This alone will significantly change how the bank views your company.
When you are approached about interest rates, you will be able to discuss calmly whether the level is appropriate for your company’s creditworthiness.

⑤ Build ‘earning power’ to absorb increased interest costs

Ultimately, it comes down to the profitability of your core business.
If you have the power to earn more than the increase in interest, your company will not be shaken.

• Negotiate prices with business partners to cover increases in costs and labor expenses (price pass-through)

• Review the profitability of each product or business and reconsider those that are unprofitable

• Liquidate unused assets or excess inventory to reduce necessary borrowing

Measures against rising interest rates ultimately boil down to ‘building management strength’.

Things you should not do

If you are not used to rising interest rates, there are mistakes you might easily make.
Here are three typical examples.

✖ Reducing cash on hand through early repayment because you want to lower interest costs

‘Interest is a waste, so let’s pay it off with spare cash.’
I understand the sentiment.
However, it is not easy to borrow money again once you have paid it back.

We live in an era where we don’t know what will happen due to high prices and rising labor costs.
I believe there are more situations where you should prioritize the ‘peace of mind’ of having cash on hand over saving a little bit of interest.

✖ Accepting an interest rate proposal without checking the details

It is somewhat inevitable that the base rate will rise.
However, you need to check whether the ‘spread’ (the additional margin) has also increased.

Even just asking, ‘How much of this increase is due to the base rate?’ can change how the bank responds.

✖ Refusing emotionally and damaging your relationship with the bank

Conversely, rejecting it by saying, ‘I can’t accept that!’ is not a good strategy.
Banks are important partners that provide funds when you need them most.

Calmly discuss the terms while presenting your own figures and rationale.
This approach will ultimately lead to the best possible terms.

Summary

Rising interest rates themselves cannot be stopped by the efforts of a single company.
However, you can minimize their impact.

The key points are ‘understanding’ and ‘preparation’.

• List your company’s borrowings and identify where the impact will come from

• Calculate cash flow in advance in case interest rates rise

• Communicate regularly with your bank to become a ‘transparent company’

These are all modest tasks, but the sooner a company acts, the more options it will have.
Let’s turn this ‘world with interest rates’ into an opportunity to get ahead.

Are you struggling with your loans all by yourself?

‘I want to properly organize the overall picture of my loans.’
‘The bank approached me about interest rates, but I don’t know how to respond.’
‘I want to create a cash flow statement, but there is no one in the company who can do it.’

If you are such a president, please make use of our External CFO Service.

An external CFO with a banking background will work alongside you as if they were your company’s financial executive.
For example, we will work together on the following:

• Inventory of loans and creation of a summary list

• Creation of cash flow statements and business plans that incorporate interest rate hikes

• Preparation of financial results presentation materials for banks and attendance at bank meetings

• Negotiation support for interest rates and refinancing terms

It is perfectly fine if you are still at the stage of ‘not sure if I will hire you yet.’
Please feel free to consult with us first.

▼ Click here for consultations and inquiries regarding outsourced CFO services

In this note, I share financial information useful for SME business owners.
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Thank you for reading until the end!