Fed officials have already implemented six rate increases in a row, the largest increases in interest rates since the 1980s, as the cost-of-living crisis continues to hit consumers.
For many businesses, interest rates are an important factor to consider. Even a small tweak in the benchmark rate can have a big impact on the bottom line of your company, so it’s important to be aware of how those changes might affect you.
In this post, we’ll discuss why interest rates rise, as well as what that means for your business.
What Does Rising Interest Rates Mean? Why does it happen?
Interest rates are the cost of borrowing money. They’re expressed as a percentage of the amount borrowed and are determined by supply and demand. When more people want to borrow money than lenders have available, interest rates rise—and conversely, when more lenders want to lend their money than borrowers have requested, interest rates fall.
Interest rates can also rise or fall based on economic conditions. For example, if inflation increases because the economy is booming and there are more goods being produced than consumers can buy, interest rates will increase in response.
The Impact of Rising Interest Rates on Your Business
Whether you own a small business or are looking to start one, rising interest rates can affect your business in many ways and have an impact on your bottom line. Here’s how:
1. Lower Consumer Income
When interest rates rise, consumers have less money to spend on goods and services and businesses lose revenue.
This can be a problem for businesses because it means they have fewer customers. If people are spending less money, companies need to lower their prices in order to sell more products or services. If you’re a business owner, this could mean losing money on each sale—which is obviously bad news for your bottom line.
2. Difficulty in Obtaining Loans
If you’re a business owner, rising interest rates could mean that it’s more difficult to get the financing you need. Because higher interest rates make it more expensive for banks to lend money, banks might turn down qualified borrowers in favor of less risky customers with higher credit scores.
The lower your credit score is, the harder it is for you to qualify for financing that’s affordable enough for your needs.
If you’re looking to start a new venture, a higher interest rate could also mean you’ll need more capital than anticipated.
3. Higher Loan Repayments
The higher the interest rate, the higher your monthly loan repayment will be. This can have a real impact on your cash flow and may require you to adjust how much money you set aside for loan repayments. This could mean that you have to put off hiring new staff or purchasing new equipment until the next financial quarter.
If you’re planning on taking out a new business loan or refinancing an existing one with a lower rate, now may be an ideal time to do so before interest rates rise further.
4. Reduced Investment Opportunities
When interest rates rise, businesses may be hesitant to take on new risks and purchases. The riskier an investment is, the higher return it needs to make sense for a business owner to take on that risk. A higher interest rate means that the returns on new investments need to be even larger than they were before in order for businesses to make them.
If you’re a business owner, this means your company may not grow as fast or make as many investments in the future.
5. Bigger Overheads for Businesses
Rising interest rates can also cause bigger overheads for your company. This is because suppliers may now need to charge your business more for the products you rely on.
With the price of utilities also rising in relation to interest rates, your business’s growing operational costs could significantly impact your bottom line.
Feeling the Pinch by the Recent Interest Rate Rises?
As a small business owner, rising interest rates could make it more difficult for you to grow your business or even stay in business. Thankfully, help may be at hand in the form of a merchant cash advance or term loan from Zinch.
Contact us at (714) 500-6622 to learn more about your options. You could qualify for up to $250,000 in just 24 hours.
