How an Increase in Rates Affects Your Business

Feds raise interest rates
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As you may have heard, the Federal Reserve raised loan interest rates in their March meeting. This impacts business and consumers alike, with rates increasing for mortgages, business loans, auto loans, and more.

CNN reported that this was the second rate hike since December and “is a sign that the central bank plans to raise rates faster this year.” In fact, CNBC explained that the Feds said they expect the federal funds rate to be about 1.4 percent by the end of 2017.

But it’s not all bad. Rising interest rates typically occur when the Feds are confident the economy is strong, and since when is a strong economy a negative thing for business and consumers?

However, we understand that the phrase “rising rates” is scary and the increase could potentially have an impact on your business. We want to help you get through it.

How to Manage Your Business in a Rising Rate Environment

What actually happens when the feds raise rates? Banks and other loan institutions have to raise their rates too which makes access to cash a little more difficult for some business owners. Since another raise is imminent, it’s best to start preparing your business now and understand exactly what it means when rates go up.

Plan for Potentially Halted Business Growth

For many business owners, this isn’t your first rodeo. You’ve been through fluctuations in rates, possibly even the market crash in 2008, and had to learn to come back from that. Direct Capital was impacted during that crash and had to work to come back from it, too, so we get it.

This increase isn’t expected to be astronomical, but it might be a little more difficult to get a loan at a rate that works for you right now. If you were expecting to use that cash for business growth, you may have to switch gears a little. Keep your head high, though, because you’ll learn to manage through it. And trust us… your business will grow!

Manage Your Cash Flow

Again, because loan interest rates are rising, getting extra cash as a buffer to help with expenses like receivables or paying off invoices might be more difficult. But you can start preparing to combat that now. While cash flow is good, take a look at outstanding items and determine how and when you’re going to pay them all. If you need to delay payment on some things, work it out with your suppliers or creditors.  Plus, if you are owed money for services rendered or products provided, send out your invoices promptly. This way, you can be sure you consistently have a steady flow of cash.

Expect A Temporary Decrease in Customer Spending

Loan rates rising impacts not only businesses, but consumers, too. Bizjournals.com explains why: “When consumers have to pay higher interest on personal loans, including mortgages and auto loans, they have less disposable income to buy goods and services.” They also say that higher rates makes saving money more of a priority for consumers than it has in the past.

Even though foot traffic may decrease temporarily, you’ll eventually see it bump back up. When customers start to understand the rate increase, they’ll find ways to combat it too and you’ll see demand for your goods and services increase once again.

Our own Scott Lynch, Vice President of Client Services, has been with Direct Capital through all sorts of interest rate highs and lows. Despite how difficult it can be for businesses to manage through rising rates, all signs lead to a positive outlook for the future. Here’s what he had to say about it:

”Nobody jumps for joy in a rising rate environment, but it’s a necessary tool used by the Fed to balance inflation and/or deflation. Direct Capital has been through many of these cycles and we advise our clients to stay the course. Understand that while rates might be higher than last year, they are still in the historic low range and the cost of missed opportunity is higher than the slight increase in rates. Also keep in mind you’re able to deduct interest expense on your taxes so slightly higher interest rates mean slightly higher tax deduction. Not all bad!”

With those words, we hope you feel like there’s a light at the end of the tunnel. A strong economy means a better, healthier environment for your business to thrive.