Rising or falling interest rates have a significant impact on how business owners and customers interact with each other. Raising interest rates can affect profits, savings, and whether a business has access to finance. And what is a business without finance?
The interest rate is based on the amount of money that the lender, for example, the bank, provides to the borrower, the risk premium, and the institution’s return. If you are a business owner, you need to understand how rates will affect the way your company operates.
Most businesses need seed money to grow. While providing financing in modern economic conditions can be a problem, owners should think twice before accepting a high interest rate. In some cases, alternative financing may be too expensive. If so, you should consider looking elsewhere to protect your finances.
1. High interest rates lower consumer income
As the score rises, consumers with debt will have to pay more interest to their lenders. This tends to negatively impact their spending habits. Because the more money they have to pay to maintain their loans, the less they have left for products and services. Let’s say you own a business that produces luxury goods or services. Then you may be hurt more by the rise in interest rates than the basic commodity company. Consumers eliminate luxury items first when they have less disposable income.
2. High interest rates make it difficult for businesses to obtain loans
Almost every small business has outstanding loans, and when interest rises, these loans become more expensive. As a rule, these are long-term debts, which will take years to pay off. Therefore, any increase in interest rates on these loans means that you will carry debt longer and pay more money. In addition, higher rates mean that it will be more difficult to take out new short-term loans. Consequently, you will not be able to pay for unexpected expenses or expand your business if necessary. This can slow down your company’s growth in the long term.
3. Low interest rates can stimulate consumer spending
In this case, consumers tend to borrow more money. Lower interest rates mean that the cost of repaying the loan is less than before. And then the savings that people get create more disposable income. This allows borrowers to pay less per month for a home loan, freeing up money to buy more goods and services. That means that your business can earn more money, develop and grow if needed.
4. Low interest rates can stimulate business expansion and growth
In this situation, it is much more profitable to take out new loans in order to invest in business expansion. The loan will cost you less if you look at the long term aspect. The best solution for your small business would be secured loans. It’s the great choice for small businesses because it’s allowing you to be in peace, no matter what happens with interest rates. You won’t deal with banks or creditors that are hassling you daily. You will also have the opportunity to refinance some of your outstanding loans. At the same time, your debt load will stabilise. When rates are low, it also means that you can take the cash your business generates and deposit it in high yielding accounts.
5. Influence of rates on the value of shares
There is a close relationship between interest rates and the price of a company’s stock. With an increase of the interest rates, the price of a company’s stock begins to decline. To prevent the growth of shares from getting out of control, the Central Bank will raise the key rate to cool investors. After all, the main goal of the Central Banks is stable economic growth. When the economy falls along with the price of shares, the Central Bank lowers the key rate to the minimum value in order to stimulate the growth of the economy along with the stock market. This was the case in 2008 – 2009, when the percentage dropped to almost zero. In many countries, this situation has persisted to this day. And in Switzerland they even adopted a negative value – 0.75%.
As you can see, interest rate directly affects the loans that a business takes to maintain or stimulate their growth. The higher the interest rates, the more difficult it is for a business to engage in projects requiring investment. Especially if it is a small business that is just in the process of developing and growing. In contrast, lower rates allow people to borrow money to buy cars and houses. Low interest rates on loans also give people the opportunity to spend more on other things, thereby creating demand for various goods and services and thus stimulating economic growth.