In December 2015, the Federal Reserve increased interest rates after a long period of lowering rates. By raising its benchmark interest rate from 0.25 to 0.50 percent, the Fed is indicating that it believes that the United States economy has recovered from the worst damage of the 2007-2009 financial crisis. Rising interest rates will likely have wide-ranging effects on all sectors of the economy, and you may be wondering what the implications are for your business.
Here are a few insights and tips on the potential effects of rising interest rates on your company's cash flow:
Review What You're Borrowing—And How You're Financing
Rising interest rates often lead to higher costs for borrowers. Since the Fed has decided that the economy is strong enough to not need the pump-priming stimulus of near-zero interest rates, the cost of small business loans and lines of credit is likely to increase in the near future after the raised interest rate. Look for a trusted financial advisor who can guide you on the best strategy for your business and help review your financing for long-term assets, such as commercial real estate, business equipment, and other capital-intensive investments for your company.
The announced interest rate hike in December 2015 was widely expected to be the first of several interest rate increases to come in the future, as the Fed tries to wean the U.S. economy off of super-cheap money. A sign that interest rates will rise usually means it's a good time to consider refinancing a higher interest loan if you haven't already before interest rates rise again. Be proactive and see how you can make some good financial moves to lock in low interest rates on long-term debt.
Reexamine Your Cash Flow
Rising interest rates can be a good occasion to take a look at the overall financial picture of your business. Higher interest rates don't have to be seen as bad news. For example, if you have a lot of cash stored away, higher rates could mean your savings start to work harder for your business. Another way that higher interest rates could help your business is if you're an importer of foreign-made goods or if you buy supplies or inputs from foreign markets. The U.S. Dollar became relatively strong in early 2016. Rising interest rates in the U.S. — while other countries tend to be cutting their interest rates — made the dollar stronger against foreign currencies. That tends to lower costs of imports and could help boost your profits if you take advantage of the situation.
It's Not Only About You
Keep in mind that your business is not the only one impacted by higher interest rates. Your suppliers and your customers may also be affected. Higher interest rates increase the cost of debt while also making saving more attractive. Both could have an effect on consumer spending. This initial interest rate hike was only 0.25 percent and most economists believe that it will not have a massive impact on consumer spending and overall economic performance, but it's worth monitoring the situation. Be prepared to talk with your suppliers and customers about their concerns.
Keep Calm and Take Care of Business
Rising interest rates are a big news item in the business world because the U.S. economy has been in a position of near-zero interest rates for almost a decade. After all that time without a rate hike, it's understandable that some people are worried about the implications for their businesses or their jobs. But it's important for business owners to not worry too much about the latest headlines or the latest economic analysis, and stay focused on what's happening in your industry, with your customers, and at your company. There's almost always a new development happening in the global economy that makes people alarmed, but smart business owners know when to stick to their knitting. Focus on what you can control.
Ultimately, the interest rate hike in December 2015 is a sign of optimism. Interest rate hikes act as a kind of “brake" to keep the economy from accelerating into a state of excessive inflation. By hiking interest rates, the Fed is giving a vote of confidence in the U.S. economy—this is a sign that the Fed believes the U.S. economy is finally strong enough to keep growing without the extraordinary measures put in place after the last financial crisis.
Hopefully, the 2015 interest rate hike was a sign of a return to greater stability in the financial markets in 2016, as well as a sign of better things to come for small businesses in the United States.
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