It’s fair to say that interest rate rises are never greeted with joyous enthusiasm. For the vast majority of people, interest rate rises tend to be bad news; which perhaps goes some way to explaining the presidential ire following the most recent rate rise by the Federal Reserve.
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Unfortunately, the last rise is very unlikely to be the last; in fact, the Fed may even push forward with up to four further rises in 2019. For business owners in particular, this news is far from welcome, and strategic forward thinking is required to overcome the obstacles such rises may present.
Why are interest rate rises so problematic for business owners?
Simply put, interest rate rises make doing business more expensive.
- If you have any loans or an overdraft on your business finances, these will become more expensive as banking institutions pass the increased cost of borrowing onto customers.
- You may find that your supplies become more expensive to buy, as suppliers adjust their prices to account for the fact they are now paying more on their debts.
- Rate rises can also impact consumer spending power, as rate rises mean that the cost of mortgages and personal debt also increase, leaving less money available for further expenditure.
Are interest rates nothing but bad news?
Not at all; as with most economic issues, interest rate rises have advantages and disadvantages.
By far the most beneficial aspect of interest rate rises is the impact on your business’ savings and investments. If you save money in an account, a rate rise means the interest that money earns will increase. Furthermore, investing opportunities abound due to interest rate rises, with savvy investors looking at debt as interest rates raise thanks to the enhanced downside-risk protection this choice offers. If you have yet to start investing your business profits, this could well be a route worth investigating in order to offset the problems rate rises can cause.
Is there any business owners can do to guard against interest rate rises?
While there is nothing a business owner can do to prevent interest rates from rising, there are a few things you can do to ensure your business is able to weather the storm. As we mentioned, looking for debt investment opportunities is one such method that may allow you to balance the books, and you could also consider…
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- Raising your prices to account for the rate rise. This is never a popular choice, but if you are selling a product or service that is in high demand, a small price rise may be worth considering.
- Cutting the amount of debt your business has wherever possible, especially if you have cash savings.
- You could also talk to your suppliers to see if they are willing to “lock in” the price you pay for the next 12 months. This may not be possible, but there’s no harm in asking.
In conclusion
Interest rate rises are rarely welcome news but, as we have seen, they can be offset and managed. Given that rates are expected to rise over the next 12 months, it’s well worth implementing a strategy to cope with these rises if and when they arrive, so you can ensure your business can continue flourishing in the future.