How to understand the impact of Federal Reserve's rising interest rates
Tue | March 2023
The Federal Reserve announced in May its 10th interest rate increase in less than a year to a targeted range of 5%-5.25% - the highest rate since 2007. The Fed did this to combat inflation and deal with tumult in the banking industry that has seen three mid-size banks shuttered.
Suppose the next moves by the Federal Reserve's Federal Open Market Committee (FOMC) coincide with market expectations for two more interest rate hikes by the end of the year. In that case, small business loans will hit a high rate of at least 9% or more.
This situation can lead small business owners to make difficult decisions. Also, according to funders, a more aggressive turn by the Federal Reserve against inflation will create more business owners to think twice before taking on new debt for expansion.
In the upcoming sections, we'll delve into the various impacts of interest rate hikes on small businesses, including increased borrowing costs, reduced consumer spending, and decreased investment opportunities.
We'll also provide valuable insights on how small businesses can safeguard themselves from these effects and adjust their strategies to remain competitive in a rising interest rate environment.
What impact will the Federal Reserve's rising interest rates have on small businesses?
Most small businesses take out loans to weather the storm when their companies aren't doing well or need to expand. But with the hike in interest rates, money has become more expensive, making it hard to secure financing through traditional means. You need an actual revenue-generating use for that money to make it worthwhile.
On the other hand, financial institutions like banks have tightened their lending strategy, especially the underwriting process, meaning they have become more uncompromising with verifying income, assets, debts, and property used to secure loans.
When the stringent lending process combines with less demand due to customers' spending less, it becomes harder for business owners to run their enterprises. Furthermore, credit card interest rates may rise, which means higher monthly payments. There is no scenario where a small business is unaffected by the increasing interest rate.
Also, the Fed will likely keep increasing the interest rates until inflation reaches moderate levels. Therefore, it is up to you to protect your business from rising interest rates. But how do you achieve this?
Tips for managing your business when interest rates rise
In the following sections, we will detail some steps that will help you protect your small business from increasing interest rates.
Analyze your profit and loss (P&L) statement
A profit and loss statement shows whether your business is succeeding or failing. It summarizes costs, revenues, and expenses within the period under review; this could be a fiscal quarter or a year.
One way to protect your business against increasing interest rates is by constantly analyzing your P&L. To do this, focus on the following:
Sales: Review your sales, noting the months you performed well. Then duplicate the steps you took at the time to get similar results.
Sources of income: Look at the different ways your business makes money, separating the profitable ones from the ones that aren't. Also, check income sources that consume time and resources and cut them.
Seasonality: Seasons affect businesses, creating peaks and downtimes. So, identify seasons where you make higher sales and get raw materials cheaper.
Cost of Goods Sold: How much does it cost to create a product or render a service? What do you get as revenue? The income should be more than the cost; if it isn't, ask yourself if you should continue rendering such a service or selling the product.
Net income: Your net income is how much your business made in the period under review compared to the running cost. Your net income should always be positive unless you make a strategic investment.
Before analyzing a profit and loss statement, you should learn how to create a profit and loss statement for small businesses and how you can use your report to assess your company's financial health.
Make a plan
Failing to plan is planning to fail.
It would be best if you always had a plan, whether or not you run a big or small enterprise. Your plan should include what you will do if the interest rate rises again. How to pay off/refinance existing debt, keep your business going, and whether or not you need to lay off part of your staff.
You should also have a plan for when things get better. What will you do if you get financing despite the increasing interest rate? Picture scenarios affecting different parts of your business and prepare for them. So, while hoping for the best, remember to plan for the worse.
Avoid unnecessary spending
You must stick to your budget and account for every penny spent. Before investing, hiring new staff, or buying new equipment, ask yourself if you can do without it. Create a scale of preference and spend money based on it. If your business can go without what you want to purchase for a while, it's better to push it backward.
Hire smart
Most business owners hire more employees than they need. Check your staff and consider laying off underperforming employess. You might need to hire new people to replace the outgoing employees. In such a case, ensure you get only those you need and high performers.
Keep your employees engaged
Your employees are the engine that keeps your business running. They help you execute your plans and promote your brand image. So, it would help if you did all you could to keep them engaged. Disengaged employees are more likely to leave a business, and with the high cost of turnover, it is better to retain staff than to lose them.
Get a business financing partner that will work with you
Money is crucial to keep a business ongoing and having a financial partner will help you keep your doors open as the Fed interest rate climbs. This way, you will always have a cash influx when needed.
At One Park Financial, we provide quick and hassle-free working capital for small businesses if you've been in business for at least three months and generate a minimum monthly revenue of $7,500. Contact us to get more information.
Should you get business financing now?
The answers depend on why you need financing. If there's an opportunity for growth or expansion and you need funding, then DON'T WAIT. One Park Financial will help you get the capital you need.
We are not like the traditional banks and are not tied to the Fed interest rate, as they are. So, although we are also affected by the increase, like most businesses, we are also more flexible than traditional financing institutions. Our credit decisions are more relaxed than banks making us a preferred choice for small businesses.
Also, we work with a network of top alternative business financing partners who require minimal documentation and are not turned off by "bad" credit. So, make sure to fill out our online form, and one of our business funding managers will contact you immediately to help you get the working capital your business needs.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.