The Potential Impact of Interest Rates On Your Business
If you’ve been in business for some time, you’ve most likely realized that there are economic influences that are beyond your control. Regardless of how well your business operates, it still relies on the condition of the economy. For one thing, market prices are determined by the levels of supply and demand. It should be noted that interest rates also go up and down as prices in the market change. Every rise and fall of interest rates can significantly affect your business in several ways. The more you understand the role, influence and impact of interest rates, the better you’d be able to maximize their positive effects and protect your business from the negative ones.
Defining Interest Rates
Interest rate is basically the amount a lender charges on a loan. However, it can also be the percentage a bank pays on the money you save in your bank account. Whether you’re borrowing or saving, the interest rate is an essential component of the economy. It’s important to point out that the variations in interest rates do not happen at the bank or lender’s whim.
The Federal Reserve, which handles the money in the economy, also imposes the interest rates. They either lower or raise the rates to stabilize the economy by keeping employment high, regulating prices, making loans accessible, etc. Then the bank or lender sets their interest rates, following the changes made by the Federal Reserve.
Potential Impact of Interest Rates On Your Business
Any change in interest rates can affect your business, whether you have a loan or not. Lower or higher interest rates can either be destructive or beneficial to your business. But regardless, it’s vital to note that the impact of such changes may vary from one business to another.
The following are among the many ways these changing interest rates may affect your business operations.
When the interest rates rise, the primate rate or the lowest rate of interest at which you can borrow money goes up as well. It generally means that banks or lenders charge more, making business loans more expensive. Since you will need to pay more interest, it will be much harder to take short-term loans.
Higher borrowing costs can be a set back to your business’s growth. Since it will most likely take you a much longer time to pay down your debt, you might decide not to push through with your business plan. New projects might be delayed due to your inability to secure financing.
On the other hand, more loan opportunities would be available if the interest rate is low. With low-interest loans, you have more spare money to fund new equipment or start a new business venture.
Sales and Profit
If your business sells luxury goods, you’re going to be hit harder when interest rates go up. It’s because most consumers will likely cut back on non-essentials. Note that one of the effects of higher interest rates is less discretionary income for consumers. With their reduced ability to buy products and services, your business’s sales and profit will also decrease.
But when interest rates drop, consumer spending will generally increase because they have more cash available in their pockets. Since interest rates are low, they will be more inclined to take out a loan and make impulse purchases. With that, your business’s sales and profit will eventually increase.
How To Prepare Your Business For Rising Interest Rates?
Rising interest rates are not entirely bad. Although they can have a depressive impact on your business, interest rates also play an essential role in the country’s economy. It’s typical for business owners to feel down and frustrated during such a time. But the good thing is, the rising rates often have several indicators.
It may take a lot of work to prepare your business for the possibility of rising interest rates. For starters, try to check your business operations when the interest rate is still low. Most businesses are at ease, taking on debt when interest rates fall. But keep in mind that anything can change in a moment.
Thus, ensure to plan carefully to invest only in what is necessary for your business to grow at a reasonable pace. Before you borrow money to buy new equipment or make improvements, always remember that they will cost more when rates go up. An article on CreditNinja has some more information on the impact of interest rates, but would also help to learn more about interest rates on any finance website.
It isn’t easy to know what the economic conditions will exactly look like over the next few years. But as a business owner, maintaining a watchful eye on the trends in the economy and your business finances is of paramount importance. It’s always better to be proactive on this aspect by having a contingency plan in place. So when the economic environment isn’t favorable, you’ll know what to do.