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Updated: March 27th, 2020
Eight times a year, a decision is made in Washington D.C. that can have a big impact on your bottom line.
This is when the Federal Reserve meets to decide whether to adjust the federal funds rate, the rate banks charge one another for overnight loans. Whether this rate goes up, goes down or holds steady, it has a ripple effect on other aspects of the economy including interest rates for business and consumer credit, foreign exchange rates, the stock market, employment, and the price of goods and services.
As The Balance explains, the Fed uses rate adjustments as a tool to maintain healthy economic growth. Neither a rate hike nor a rate cut is inherently good or bad for small businesses. A lower rate, generally, leads to increased consumer spending and cheaper lending, but could allow inflation to creep in. A higher rate can mean the opposite occurs.
The Fed recently started inching the rate up, after keeping it relatively steady for much of the past decade. The moves are widely seen as a show of confidence in the U.S. economy, but they’re causing some concern among small business owners, according to a recent Funding Circle survey of ~1,000 small business owners*.
In the survey, 62 percent of respondents said they were concerned about interest rate hikes affecting their business over the next 12 months. Additionally, 60 percent expressed concern about the effect on customer demand for their goods and services. Some owners said they’d be less likely to invest in new equipment, technology or vehicles (23 percent), or even to hire new employees (16 percent) if rates continued to increase.
With more rate increases possible in the months ahead, the time is now to start thinking about how your business can prepare for and manage through a rising rate environment. Here are a few tips:
If you’re thinking about pursuing business financing in the next 12 months to kickstart your growth, it may be wise to consider applying for a fixed-rate loan sooner rather than later. Locking in a fixed annual interest rates makes your repayment schedule predictable and ensures a consistent, once-monthly payment over the life of your loan.
Don’t forget to consider how rate fluctuations may affect your customers, and prepare accordingly. While consumer confidence remains high, rising rates could mean consumers have less to spend at your business in the future as their credit card or mortgage bills swell. The impact of a Fed rate increase is gradual and can take 12 months or more to affect the economy, but it may be worth factoring this into your long-term plans.
It’s never a bad time to look at ways to cut your small business costs, and this becomes all the more important in a rising rate environment. Being smart about your costs, including managing overhead and keeping inventory levels in line, will set you up to succeed in more challenging economic conditions. It’s also a good time to re-examine your debt-to-equity ratio, and consider whether paying off or refinancing higher interest variable debt with a lower, fixed rate is right for you.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.