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The era of rock-bottom interest rates is over. After nearly a decade of near-zero interest, the Federal Reserve is intent on raising rates. The good news is the Fed’s actions are a vote of confidence in the economy.
Typically, when the Fed raises interest rates, it rewards savers with a higher rate of return. On the flip side that can hurt borrowers as the rates on loans will also increase.
They say knowledge is power. The best preparation for any financial shift is an awareness of what lies ahead and how it could impact your business.
When the Federal Reserve hikes interest rates, the cost of borrowing money becomes more expensive. Here’s four ways this could impact your business.
1. Credit card interest rates could rise.
Know your credit card interest rate. Most credit cards charge a variable interest rate, based on the prime rate. The prime rate is usually about 3 percent points higher than the federal funds rate. When the Fed hikes the federal funds rate, the prime rate moves up and that tugs credit card rates higher too.
Action plan: Ideally, your business pays its credit card bill in full each month. But if that isn't feasible right now consider switching to a business credit card with a 0% introductory APR on balance transfers and purchases. Typically, these cards allow business owners the ability to shift debt from a higher interest credit card to an introductory 0% rate for a set period.
2. Small business loan rates could increase.
If you have a loan from the Small Business Administration (SBA), the base interest rate will likely change as market rates increase. If you have a small business loan for $100,000 with an interest rate at 6.0% for a 120-month period your monthly payment would be $1114.60. If the interest rate rises to 7% your monthly payment could increase to $1166.35 or $621 over a 12-month payment period.
Action plan: Consider building anywhere from a 0.50-1.00% increase into your loan repayment assumptions over the next 12 months.
3. Higher rates could squeeze your customer’s disposable income.
Rising interest rates could pressure your customer’s monthly cash flow. When consumers pay higher interest rates on their credit card debt, or adjustable rate mortgages, it means less disposable income for other goods and services.
Action plan: If you run a consumer-driven business, consider promoting core goods and services that are ‘must-haves’ for your customers.
While this may sound like a lot of bad news, there could be a silver lining to the rising interest rate environment.
4. You may be able to raise your prices.
Your business might be able to raise prices on the goods and services that you sell. Typically, but not always, the Federal Reserve hikes interest rates during inflationary periods, or when prices are rising throughout the economy.
Action Plan: Look at your pricing model, compare prices with your competitors and evaluate if the time is right for a price increase.
Focus on What You Can Control
Part of being a successful business owner means riding out ups and downs of the business cycle. That includes expansions, recessions and sometimes rising interest rate environments.
Try to build out a cash reserve fund. Many businesses, especially those just starting up, run on a shoestring budget with limited cash flow. Just as individuals should strive to build up an emergency cash fund, business owners should aim to do the same.
Higher interest rates may be part of the new economic cycle that could dominate in 2017 and 2018.
Stay on top of your finances and pay your business bills on time. This could pay off with a higher business credit score. Higher interest rates may be part of the new economic cycle that could dominate in 2017 and 2018. Careful planning now could help your business thrive during the new cycle.