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Updated: October 9th, 2023
Interest rates in the United States have stood at record-low levels since the onset of the pandemic—but that’s about to change. The Federal Reserve, the bank that dictates the rate of lending, plans to raise interest rates to deal with high inflation. The first interest rate hike could happen as soon as March 2022, according to experts, with multiple potential hikes planned after that.
Whether you’re currently paying off a business loan or looking to apply for a loan, it’s important to understand how these increased interest rates could impact your plans.
Changes to the economy have a ripple effect. Fluctuating interest rates influence how your business operates, how much revenue or sales you bring in, and how loyal and consistent your customers are. Here’s how:
Rising interest rates make your business debt more expensive, which means you’ll have to use more cash to cover your interest costs. Depending on your business’s overall financial health and profit margins, you might have less flexibility to invest in long-term growth—or less day-to-day cash flow stability.
When interest rates go up, not only do long-term loans become more of a burden, short-term loans also become less accessible. The first hurdle is qualifying. When short-term financing solutions—like business lines of credit or business credit cards—have higher interest rates, you may need even higher credit scores to get approved.
The second hurdle is repayment. Even if you do get approved for a short-term loan, the interest rate may be too high to manage, setting you deeper into debt. If you can’t afford to take on short-term debt to bridge a cash flow gap or deal with an emergency, your business might struggle to get ahead.
When interest rates rise, the average person has to shell out more money to make the minimum payments on their student loans, car loans, and mortgages. When finances are tight, people stop spending as freely and start eliminating certain purchases. Depending on your business’s industry and customer base, your particular services or products could be the first expenses consumers cut from their lives. As a result, your customer retention or acquisition rates could drop, lowering your overall revenue and sales.
Your business finances are the foundation of your operation, so it’s crucial to have a solid grasp on your business’s expenses, cash flow, and profits. Changing interest rates, however, can confuse even the most straightforward of finances. With interest rates in flux, you may have a harder time updating your financial plan and preparing for growth, especially if you already have a variable-rate loan.
If you’re considering applying for a business loan before federal interest rates increase, it’s crucial to make sure you’re doing it for the right reasons. A business loan can help you stabilize or expand your operation—but only if you’re in a decent financial position.
Here are a handful of reasons to apply for a business loan soon before interest rates spike:
Before you decide to apply for a loan, take some time to consider your funding needs, business goals, and financials. Ultimately, you want a loan that will support your operation, not drag you down. That’s why it’s a good idea to hold off on getting a business loan if:
If you’re eager to lock in a low interest rate or invest in your business’s growth, here are several different financing options to consider:
If you’re interested in a long-term business loan, consider applying with Funding Circle. If you qualify, you can borrow anywhere from $25,000 to $500,000 or more with repayment terms between six months and five years. We offer fixed rates, so you can score your best possible interest rate before the next hike, then budget accordingly.
Plus, we have no prepayment penalties, which means if you’re ready to pay off your loan early, you’ll only pay interest on the time you borrow. The result: more flexibility with cash flow and planning, so you can make the decisions that work for your business. Learn more about how we work or apply for a loan today.
Paige Smith is a content marketing writer who specializes in writing about the intersection of business, finance, and tech. Paige regularly writes for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.