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How Can Interest Rates Affect Your Small Business?

The interest rate is known to have an impact on traders who invest in financial markets. But being one of the economic influences, it turns out that the rising and falling of interest rates also have direct effects on small business owners. That’s because businesses, regardless of size, depend on dynamic economic environment conditions.

But how can interest rates affect your small business?

Find out how you can make informed financial decisions with the current interest rates and even future ones. Equipping yourself with this knowledge may help you save your business at any given time.

Business Financing

Many small business owners depend on credit to help finance their business activities. It’s worth noting that the amount lenders charge on the loan interest greatly depends on the Federal Reserve’s rate (FED). As the FED fund rate increases, lenders will also raise credit card and loan rates, making it more costly for businesses to get the funds they need.

Due to the risk of businesses not being able to afford to repay such interest-rate hikes, there is likely to be a reduction in bank lending. As a business owner, it may not only take you a lot longer to pay off debts because of more expensive interest rates– it may also become more difficult for you to obtain financing.

Business Cash Flow

Cash flow is the lifeblood of businesses of any size. But small businesses are more likely to operate with limited cash flow. It’s even more so when they have loans and the interest rates increase. The income available in the business will be reduced as they have to set aside more additional cash to repay their debts. In effect, cash flow will also be scarce.

Business Sales

Whenever interest rates rise, consumers pay more on their loans as they pay more interest to lenders. Because of that, they have less disposable income to buy goods and services. There is a greater probability that your business may suffer from a decrease in sales.

But note that the impact of interest changes may differ from one business to another. If your business sells luxury goods, you’ll be hit the hardest when interest rates increase since most customers are likely to cut back on non-essentials. When there’s a reduction in sales, cash flow will be squeezed further.

Business Growth

The inability to get a loan with a reasonable interest rate can impact your business’ ability to grow and expand. With an interest-rate hike, you’ll be charged more on a business loan, and higher loan payments may result in decreased sales and profits. Chances are, you may be compelled to reallocate resources away from innovation and reinvestment.

But on the other hand, you can make more profit and fund your business’ growth when interest rates fall. Low-interest rates make taking out loans cheaper, which encourages consumers to spend more money on both essentials and non-essentials. You can then expect higher profitability, allowing your business to have a positive cash flow.

When interest rates are low, businesses also have more access to financing because loans are less expensive. As a result, you have better resources to fund new business ventures, equipment, or improvements.

Strategies To Manage Uncertain Interest Rates

As you can see, the changes in interest rates can either positively or negatively impact your business. The falling and rising of interest rates can make a big difference from borrowing capacity and consumers’ income and spending to your business’ profit and expansion. But knowing their potential effects isn’t the end.

It’s essential to equip yourself with certain strategies to mitigate the risks of higher interest rates and maximize the benefits of the lower ones. Because though there is no exact time when they will rise and fall, there are indicators when interest rates are about to change.

Nevertheless, here are some tactics you can employ to prepare your business for such uncertainties.

Rising Interest Rates

  • Evaluate how much debt your business is carrying.
  • Convert some variable rate loans to a fixed rate.
  • Go over your business cash flow and customers’ spending habits.
  • Have a flexible business plan in place.
  • Make time to monitor the changing rate environment.

Falling Interest Rates

  • Think about potential business returns in terms of probabilities.
  • Invest only in what is certainly essential to grow at a reasonable time frame.
  • Consider refinancing fixed-rate loans.
  • Take careful note of what is sustainable hiring and manageable employment.
  • Improve the predictability of your business cash flow.

In Summary

Dealing with interest rates is just one of the many uncertainties that every business may encounter now and then. But while it’s impossible to eliminate such unpredictable occurrences, there are various ways to minimize their risks. In the case of interest rates, businesses should be more mindful of whether or not it’s a good time to take out a new loan.