How Rising Interest Rates Can Affect Your Small Business

Rising interest rates have affected the personal saving, spending, and borrowing habits of many of us.  But what about small businesses? You may be wondering how higher interest rates might affect a business. Here are five ways that interest rates can influence the decisions and health of small businesses.

Higher Interest Rates Affect How You Pay

The most obvious way that high interest rates can affect small businesses is its influence on how you pay. When interest rates are low businesses may choose to use credit more frequently to make purchases. Buying on credit adds more to the total cost of goods and services when interest rates are higher. Thus, higher interest rates usually incentivize businesses to pay more often with cash if they can.

Higher Interest Rates Affect How You Borrow

Another obvious effect of rising interest rates is on the ability and desire of businesses to borrow money. Higher interest rates make the decision to borrow a more serious decision with greater consequences. Borrowed money will cost a business more over the lifetime of the loan when interest rates are higher. Conversely, businesses may also find it harder to qualify for loans or to get loans paid off when rates are higher.

Higher Interest Rates Affect How Customers Buy

These two effects add up to higher costs for small businesses, but interest rates can also have an effect on profits. Because interest rates are having an impact on everyone, they are also affecting customers and their buying decisions. Consumers don’t have as much discretionary cash to spend so they have to be more discerning in their spending choices. This will inevitably result in most businesses selling less and profiting less.

Higher Interest Rates Affect How You Hire

Higher costs and lower profits add up to less money available to businesses to be able to add employees. This may influence businesses to forego adding employees or it may cause them to look for creative ways to keep salaries low. In the worst case scenario, it may even mean that businesses will lay off employees in order to weather the higher interest rates.

Higher Interest Rates Affect How You Plan

As you can see, rising interest rates can affect businesses at their most basic level by influencing their costs, their profits, and even their employee composition. This in turn will have an impact on how businesses plan for the future. Will they invest in growth? Will they look to expand? Will they take a risk on a new product or service? Higher interest rates will influence the lens through which small business owners evaluate their options for the future.

As you can see, rising interest rates can have major effects not just on personal pocketbooks but also on small businesses and their short-term and long-term decisions. As you make decisions about the lending options for your business, remember that Federated Bank offers flexible options for loans and lines of credit and that our experts have the experience to help you find the best financing for your specific situation.

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