Interest rates. It may not be the most exciting topic, but some of the most important topics rarely are. Interest rates affect multiple aspects of our lives from economic outlook and business growth decisions to consumer spending, mortgage decisions, and personal finances. Whether interest rates trend upwards or downwards, they have a ripple effect within our economy.
Effects of Interest Rates on Businesses
The basics of interest rates and how they affect businesses are not hard to understand. High interest rates impact businesses since many rely on loans for capital. Debt can become more expensive, especially if the business has variable interest rates on their loans. Small businesses are particularly vulnerable since interest rates have an immediate effect, making it harder for them to meet their daily financial obligations in the event of an emergency expense.
When it costs more to borrow capital, businesses tend to hold off starting new projects, buying new equipment, or expanding their business, which can hamper the growth of the company. Compound that with customers having less discretionary income due to higher interest rates and businesses may see their profits dwindle.
Conversely, during periods of low interest rates, businesses may be more willing to take on risks and grow as it becomes cheaper to borrow capital.
What Business Can Do
With this in mind, there are several things that a small business can do. The first would be to meet with your banker to understand where your current loan rates are relative to the market. Something else that should be considered is whether it is a good time to refinance or fix variable interest rates into long-term fixed rates, especially if you believe that rates will increase in the future.
Lastly, if you are considering a long-term fixed rate, whether it is on a new loan or refinancing existing debt, consider using an interest rate swap to manage the interest rate risk and fix the rate on the financing. An interest rates swap can be an efficient and effective way to achieve the desired fixed rate. While there are a number of benefits to this type of approach, there are also risks to consider, along with accounting and regulatory considerations. As always, it is important to understand the risks and benefits or seek advice before entering into a more complex transaction.
As far as the future goes, it is hard to tell if interest rates will continue to decline or rise. There are too many national and global factors at play to make an accurate prediction. However, after the most recent rate cut, the Federal Reserve has signaled a wait and see approach before considering future adjustments. In mid-2019, we saw that long-term rates were lower than short-term rates. But more recently and after multiple short-term rate cuts, long-term rates have begun to move up. Despite that, there is still a high degree of volatility and this can cause some confusion or worry. If you are still not sure what your next steps should be in this current economy, I’d recommend speaking with a banker.