The Federal Reserve raised the interest rates for the first time in nine years last week, signaling that the economy is performing better. Interest rates were raised in response to a growing gross domestic product (GDP) and a decrease in unemployment, so this was received as good news overall. But what does an interest rate hike mean for your small business now and in the future?
Though opinions vary on how and to what degree small business will be affected by the current rise in interest rates, the fact that the rate hike indicates an improvement in the economy should have an impact on small business, believes Adam Markel, CEO of New Peaks, which provides business and personal development training.
“Interest rates impact business at every level, because the pivot of interest rates signals a change in not only the economy but, more importantly, the psychology of the economy,” Markel says. “When people are positive about the economy, they buy more. The pivoting of interest rates to the upside signals more inflationary concerns on the part of the Fed, which is a foreshadowing event to greater consumer optimism and spending. This change will bode positively for small business in the short run, as more money is likely to flow into the system as a result of more positive sentiment. In the longer run, it may allow for some price increases to stick and create greater margins.”
Industries Most Affected by Interest Rate Hikes
Though Robert Rasmussen, COO of Balboa Capital, believes that every industry should be concerned about interest rate hikes because they can cut into profitability, he points out that some small businesses may have more reason to be concerned than others.
“Industries that need to be more concerned than others are those whose product sales are dependent on financing,” Rasmussen says. “The long period of low interest rates helped businesses such as equipment dealers, commercial vehicle dealers and specialty retailers, to name a few, but rate hikes could soon change that. Big-ticket items and specialty items are rate-sensitive; customers seeking to purchase them want financing that is backed by competitive rates and flexible terms.”
Markel agrees. “Small businesses in industries such as real estate, mortgage lending and short-term lending will be impacted more immediately," he says. "It is likely that we will see a surge in applications for home loans and even higher home prices in the short-term, because consumers will fear that interest rates will rise and they will miss their golden opportunity to either buy or refinance property.”
Interest Rate Effects on the Bottom Line
The recent interest rate hike could affect several bottom line activities of small-business owners, according to Rasmussen. “Rates on conventional small-business loans will most likely increase, which would make it more expensive for small-business owners to borrow money to purchase equipment, fund expansion initiatives and cover daily operational expenses,” he says. “However, a slow interest rate increase might not have a significant impact on business lending in the short term.”
An interest rate increase can also affect the prices of products and services over the short and long term, Rasmussen notes. “Higher rates can drive up operational, manufacturing and distribution costs, and this can result in higher prices for consumers. It is also common for consumer spending habits to change after an interest rate hike, because higher interest rates on items like autos, homes and personal loans results in less disposable income.”
Higher interest rates will impact some small businesses in the amount they actually pay to borrow money to finance business operations or goods and services, Markel agrees, adding, “however, if interest rates remain steady and fairly low, as is expected, most businesses can build the higher cost of borrowing or factoring into their pricing structure as well as their cash flow.”
It can also be important to the bottom line to more closely watch use of credit cards with variable interest rates. “You’ll begin to see your minimum payments increase over the next cycle or so," says Patrice Washington, CEO of Seek Wisdom, Find Wealth. “As always, it’s best to pay in full to avoid wasting hard earned cash on interest.”
As with anything related to running a small business, it can be important to look at the long-term. “Interest rate pivots are cyclical, and it often takes seven to 10 years to complete a cycle,” Markel says. “The pendulum has now started to swing in the direction of higher rates and is not likely to change course for several years. The good news is that business owners can also plan to pivot and take full advantage of this opportunity.”
You should also keep the rate hike in perspective, advises Eric Tyson, co-author of Small Business For Dummies. “Remember that interest rates are largely set by supply and demand in the credit markets, not by small moves by the Federal Reserve,” he says. “The recent rate hike was a small move at 0.25 percent. The Fed has indicated that it may increase rates once per quarter in 2016 and in equally small increments, but if the economy softens, these hikes won’t occur. Only time will tell.”
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