Reports from the Federal Open Market Committee show that the labor market is getting stronger and economic activity is rising. In December, the Federal Reserve raised the federal funds rate to 2.5% from 2.25%. So, what do these increased interest rates mean for businesses?
How Do Interest Rates Affect Business?
A rise or a dip in interest rates has a significant impact on how business owners and customers interact with each other. Interest rate hikes can impact profit, savings, and whether or not a business will have access to financing.
Here are some ways increased interest rates can impact your business.
A Hike in the Prime Rate
Whatever the Federal Reserve does with the interest rates has a ripple effect on the prime rate. This interest rate is the lowest at which banks will lend money. When the Federal Reserve increases interest rates, the prime rate goes up. Lenders usually increase rates attached to credit cards and loans as a result. This increase makes it more expensive for businesses to borrow the money they need.
Lower Consumer Income
Whenever interest rates increase, consumers end up paying more for new debt. Because they pay more interest to lenders, they have less discretionary income.
As a business owner, if you buy and sell luxury items, you might suffer a slight dip in your sales since customers have less to spend on luxury products. Consumers tend to eliminate luxury items first from their purchase lists whenever things get tough.
More Difficult to Obtain Business Loans
There are 2 main ways through which rising interest rates affect your day-to-day financial business operations:
It makes your long term debt more expensive. Almost every business has long term debt. If you have variable interest rates on your loans, your loans can get more expensive. It can mean you’ll be paying them off for longer than you anticipated, which can increase the cost of your financing and reduce your income.
It makes short term loans more expensive. Higher interest rates don’t only affect long term loans — they also have an almost immediate effect on short term loans. It makes it more difficult for a small business to meet their daily financial obligations in the event that emergency expenses may come up.
You Could See a Dip in Your Business Profits
Any business owner looking to borrow capital to expand their operations will have to contend with a higher cost of capital to do so. It can also mean that operational costs go up. Couple that with the fact that your potential customers now have less discretionary income and you may see your profits go down.
The Federal Open Market Committee forecasts that they will raise interest rates 2 more times in 2019. These interest rate increases will affect business owners across the country. The best thing you can do is to understand how these interest rate increases can affect your small business.