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Although the impact of rising interest rates varies by business, it’s usually preferable for most small businesses to have low interest rates. It’s cheaper to borrow money to grow and invest, and with stable interest rates, you can plan for the future and/or repay or reduce debt already committed to.
Strategies may need to adjust however when interest rates climb faster than expected. For example, if business owners find their loan repayment interest rate doubling in a few months, it will be problematic if they have tight margins. This is especially true when people have been happy to borrow, thinking the record low borrowing and cash rates would hang around forever (or at least a few more years). On-going rising interest rates reverses this trend and can cause financial stress, where businesses have borrowed large sums of money in the expectation interest rates would remain the same for a little longer.
Here are a few issues with rising interest rates for small businesses.
Probably the broadest impact from rising interest rates is that mortgage rates and business loans go up. Your customers will be allocating more of their weekly wage to repaying interest, with the consequence of less disposable income to spend. If you are in an industry that is deemed discretionary by the consumer, you could be the first expense to face the chop.
Other implications include:
While higher business loan rates make long-term debt more expensive, short-term debt can also be harder to obtain. Lenders that require physical assets to secure financing will most likely want tighter requirements, such as more equity or personal guarantees. This increases the risk to you as the borrower.
It’s most likely other costs to your business will also start to rise. For example:
This inflationary pressure drives up the cost of the whole supply chain (manufacturing, distribution, services), which could translate into higher expenses for your business.
The ultimate conclusion? You don’t want your suppliers to go bust, so you’ll probably need to accept their cost increases, which eventually forces you to increase prices to your customers, causing a possible drop in demand.
When interest rates are changing, you may struggle to know the cost of future borrowing, or the cost of existing business loan rates unless you have a fixed rate. This can make it hard to plan your future finances, and when to invest in new equipment or business growth.
If rising interest rates are causing you sleepless nights, then take action to reduce the impact. For example, identify if you can:
Note that the resources listed here are meant solely as overviews and helpful information. Please consult experts regarding your specific security needs for your business.
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