Right now, small business owners are the most optimistic they’ve been in over 30 years. They’re planning on expanding, they’re earning more, and they’re looking to hire.
… So why does the government have to ruin a good thing by hiking up the Fed rate?
What is the Fed rate and why do I need to know?
The Fed rate, short for the federal funds rate, is the rate banks change one another for overnight loans (aka when banks lend each other money to make up for daily shortages or surpluses). This rate affects most other interest rates, including rates for your:
- Credit cards
- Business term loans
The Federal Reserve (a.k.a., the Fed) meets at least eight times a year to decide, among other things, whether the rate needs adjusting.
The Fed adjusts the rate to control the economy—raising it helps fight inflation, slowing down the economy, while lowering it encourages consumers to spend, boosting the economy. Since early 2016, the Fed has been steadily increasing the rate and will likely increase it two more times this year, which indicates that they continue to be optimistic that the economy can handle higher rates.
But that doesn’t change the fact that interest rate hikes can sting and tie up your cash flow. It’s no wonder a survey conducted by Funding Circle found that 62 percent of small business owners are concerned about interest rate hikes affecting their business.
Alissa Mahoney of Albany Woodworks in Louisiana explains:
“Interest rates have a huge impact on our business… If interest rates go up too much, then building will once again slow down, causing all businesses associated with construction to suffer.”
Fortunately, it’s not all bad news. In this article, we’ll break down how the Fed rate hikes could impact your business—in ways both good and bad—and what you can do to respond and prepare for future hikes.
4 ways the 2018 Fed rate hikes could impact small business owners
1. It may cost more to borrow money.
Fed rate changes affect most lending products, which means you’ll likely pay more to carry a balance on your credit card or take out a business loan. As a result, “your cash flow may be impeded somewhat if you’re paying more interest,” explains David Bakke, finance expert at Money Crashers.
How to respond:
Brian Cairns of ProStrategix says, “Now is the time to pay down your business credit card debt, because carrying a balance will continue to become more and more expensive.”
If you anticipate needing to borrow money soon and think you’ll be able to pay it off within a year or so, consider applying for a card with a zero percent introductory offer. This will allow you to borrow money (up to your credit limit) at zero percent interest for a certain amount of time—usually around six to 15 months. Just be careful to pay off the balance before the APR reverts to the regular rate.
Alternatively, if you think you’ll need to borrow more than credit cards offer—perhaps for an expansion or equipment purchase, Cairns recommends applying now. The Fed is expected to increase the rate two more times in 2018, so “the longer you wait, the more costly the financing will be.”
2. You may find it easier to get a loan.
When it comes to borrowing money, increased rates aren’t all bad—it may actually make it easier for you to get approved for a loan. In fact, according to the Biz2Credit Small Business Lending Index, more and more small businesses have been getting approved for loans since September 2017. This is because lenders can earn more charging higher interest rates, which motivates them to extend more offers.
How to respond:
In this competitive lending environment, it’s extra important to shop around for the lowest rates. Don’t take the first offer you receive, and see if lenders are willing to offer discounts such as a lower origination fee, which is the amount they charge to process your loan application.
3. You could earn more on your savings.
As rates to borrow increase, so do savings rates. If you have money to spare, now’s a great time to start building up your emergency fund, as your money will grow quicker.
For example, as of July 2018, you can earn 1.75 percent APY (annual percentage yield) for 12 months with a Spark Business Savings account from Capital One. This means that if you started off with $10,000 in savings and added $500 each month, you could end up with $16,224.77 after a year.
How to respond:
Shop around for the highest savings rates and start putting aside anything you can, preferably in a separate account so you’re not tempted to spend the money.
4. Your customers may be less likely to spend.
Since more of their money is likely going toward interest, your customers may have less disposable income to spend with you—especially if you sell luxury products or services rather than essentials.
How to respond:
Fortunately, rates aren’t changing drastically, so you may not see too much less demand. However, it may be prudent to come up with new ways to entice your customers to spend, such as offering deals or loyalty programs.
While interest rate hikes can seem scary, it’s important to remember two things:
- It’s not all bad news. Use the hike to your advantage by saving for the future and applying for low interest loans that’ll help your business grow.
- It’s not permanent. Interest rates are always changing. In fact, many market experts are predicting the next recession will hit late 2019, which should drive rates back down. Don’t worry, though—we’re also keeping an eye on how an upcoming recession could affect your small business.
In the end, interest rates are just one of the many aspects about your business you won’t be able to control, so all you can do is get educated, plan ahead, and ride the natural waves that come with owning a business.