How Business Owners Can Prepare For Higher Interest Rates

The cost of borrowing money plays a critical role for many businesses. When borrowing money is cheap, it becomes easier for companies to expand aggressively, as they can take on loans to open new offices, hire new employees, and pay for new equipment. However, when borrowing money is expensive, the reverse happens. It becomes harder for companies to expand, which forces them to reign in plans for growth. 

The cost of borrowing is controlled by America’s central bank, the Federal Reserve – which recently hinted that the cost of borrowing could stay elevated for a longer period of time than previously expected. This article will examine how business owners can prepare for an economic environment of higher interest rates.

The Fed’s Recent Moves

The Federal Reserve started raising interest rates in 2022 in an attempt to bring down inflation, which was running rampant at the time. As of August 2023, interest rates have sat at a two-decade high of 5.25%-5.50%. The Fed originally hinted that it might start lowering rates if inflation continued to cool. But, inflation has been hovering at just over 3% through the beginning of later end of 2023. The Fed aims for 2% inflation, meaning the current rate is still higher than desired.

So, what does all of this mean for you and your business?

Higher Interest Rates For Longer

In recent months, the Fed has stated that it may need to keep interest rates higher than expected. Bankrate even estimates that rates could remain elevated until 2026.

Bankrate’s projection is a bit speculative, as the Fed could change its stance at any moment depending on new economic data. However, businesses should start accepting that rates will not decrease anytime soon.

Here are a few ways that this might impact your business

• Harder to access credit: Higher interest rates will likely make it harder for your business to access different forms of credit. This means your company could either get denied entirely from a loan or (more likely) will be forced to pay a higher rate in exchange for the financing.
• Higher supplier prices: Your suppliers are facing the same credit restrictions, which means they may be forced to increase prices. Additionally, inflation is still at higher-than-anticipated levels, which could also lead to increased prices.
• Lower consumer demand: Interest rates also impact forms of consumer credit like credit cards, personal loans, and mortgages. With the cost of borrowing higher, consumers will have less spending flexibility, which could decrease consumer demand.
• More late payments: If you’re a B2B business, the same thinking applies to your customers. They’re also facing higher borrowing costs and potentially lower consumer demand. This means they might have trouble making payments on time – resulting in later payments for your business.