The Federal Reserve is expected to increase interest rates up to six more times in 2022, starting in May. With the prospect of interest rates rising six more times over the next nine months, what was once a minor concern for small business owners is becoming a major financial consideration.
In March, the Federal Reserve increased interest rates for the first time since 2018, and said it would likely continue raising them throughout the remainder of the year.
Traders are already speculating, for instance, that there will be two bigger increases in May and June, followed by up to three more during the second half of the year.
Russia’s invasion of Ukraine is causing tremendous human and economic hardship there, but domestically, the implications for the U.S. economy are uncertain.
The FOMC statement said that in the near term, the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.
Inflation is the number one concern of small businesses owners, according to a recent survey conducted by the U.S. Chamber of Commerce.
To cope with inflation, 67% of small businesses have raised prices, according to the study. Another four in ten (41%) report having decreased staff or taken out a loan in the past year (39%) in response to growing inflation pressures.
The Fed’s moves are intended to curb inflation, essentially tempering demand (and therefore prices) by making it more expensive to borrow money or buy with credit.
Consumer spending will likely cool off as a result. Some industries will feel that more acutely than others. Businesses tied to big-ticket items that require financing could see lower demand as shoppers also face higher borrowing costs.
Rising interest rates offer you a good reason to assess the big financial picture for your business. Though they tend to get a bad rap, higher interest rates can have benefits, too.
If you play your cards right, your savings could work harder for you when rates are up. Higher relative rates also could mean a stronger U.S. dollar, which could work in your favor if you import foreign goods.
Your suppliers and customers also likely will be affected. When interest rates go up, savers may reap slightly better rewards.
At the same time, customers may feel a pinch if the rates on their own loans increase, leaving them with a little less spendable income. This could slow down business for you. Have frank conversations with your customers and suppliers about their concerns.
The amount of debt on the balance sheet of small businesses keeps on increasing at a constant pace. At some point in time in the future, the central bank reverses the trend of low-interest rates being offered.
This leads to increase in the cost of debt for most small-scale businesses. Many times businesses are not able to tackle this increased cost of debt. This destroys their cash flow and over a period of time leads to bankruptcy.
The problem is this case did not really occur when the interest rates rose. In reality, the problem occurred when the interest rates were first lowered artificially. This is when the projects that were unviable in the first place suddenly started appearing viable.
Hence, it is important for small business owners to factor in the effect of interest rate sensitivity on their budgets. They should only take loans if they are relatively sure that they will be able to service the debt even if the interest rate increases.
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