Interest Rate Changes: What an Entrepreneur Needs to Know

We’ve all seen the headlines popping up on our news feeds, in the paper and in friendly conversations. But why should I care about the Fed changing it’s key interest rate? Well, here’s a brief overview of the implications of interest rate changes on your small business.

First off, the Fed’s decision to raise rates is a good sign. The Fed will only do this when it strongly believes the economy is very healthy and growing well. In fact, that’s one of the biggest reasons they raise rates. If the economy is expanding too fast, there is a high risk of inflation and thus the Fed decides to slow the economy; interest rate changes make that happen in two main ways.

Business Borrowing Costs

As key interest rates are moved up, loans become more expensive and investment capital requires a higher return. This means that businesses tend not to expand as much when rates are higher. Higher interest payments thin margins and can affect profits, thus reducing a businesses ability to re-invest.

Customer Disposable Income

On the consumer side, higher interest rates discourage borrowing and tend to lower customer’s “disposable income.” They borrow less on credit cards, spend more on increased car loans and mortgages and are more likely to save due to higher rates of return in interest earning accounts.

So, here are some recommendations on how to navigate this change in the business environment:

• Have a product or service that people want and spend some valuable time improving your value add
• Make a decent profit by keeping your expenses under control
• Manage your cash flow so you don’t have to borrow at a higher interest rate
  • Although it might seem to make sense to borrow money now while interest rates are still low, keep in mind that most loans available to business owners have a variable, not a fixed, interest rate. This means that  when the Fed hikes interest rates, the rates on your loan could go up as well.

Overall, interest rate changes can work out to having little more than small implications on your business but it is important to consider the possible effects. Keep running a good operation and offering great products and services and your business will keep growing strong.