Historically low interest rates may soon be a thing of the past. A flurry of rate hikes by the Federal Reserve has pushed the federal funds rate up by one full percentage point since the 2008 financial crisis. At least one additional rate hike is in the forecast for 2017, with more on the way in 2018. As rates rise, it’s important to understand how your bottom line could be affected.
Borrowing May Become More Expensive
While rising rates mean higher yields on savings, they can be bad news for borrowers. If you’re planning to pursue short-term financing to cover your business’s working capital needs for example, or take on a long-term loan to fund plans for growth, it may be a good idea to compare the interest rates lenders are charging. A difference of even a half a percentage point could significantly impact the cost of borrowing over the life of the loan.
Rising Rates Could Result in a Spending Slowdown
When the Federal Reserve increases interest rates, it’s generally a sign that the economy is robust. Rate hikes serve to keep the economy from overheating, while keeping inflation at manageable levels. There’s a side effect, however, that can directly impact small businesses.
As borrowing becomes more expensive, consumers may rely less on credit. In turn, they may spend less. Reduced spending means less money that’s being funneled into businesses, potentially shrinking profit margins in the process.
The good news is that consumer spending has held relatively steady since the Fed began implementing rate hikes late last year. The 14-day rolling average has ranged from a high of $109 at the end of December, to a low of $81 in the fourth week of January. Overall, spending continues to surpass 2016 levels. This is an encouraging sign that consumers aren’t yet pulling back because of rising rates.
Prep Your Business for Further Rate Hikes
If the Federal Reserve continues raising interest rates, it’s important to make sure your business is as prepared as possible.
If you have plans to expand, you may want to consider following through sooner to take advantage of still-low rates. Likewise, now may be a good time to consolidate existing business debts if you’re concerned about rates climbing quickly.
Taking steps to improve your credit is also wise if you think you may borrow later on. Reviewing your personal and business scores, checking your credit reports for errors, and making your payments on time can strengthen your score. That can work to your business’s advantage if you need a loan in a rising interest rate environment.
Looking to get additional funding, expand, or update equipment before additional rate hikes go into effect? Strategic Funding provides an array of financing products for small businesses. Contact us for a free consultation with one our financing specialists to see what amount your business qualifies for today.