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How Will Rising Interest Rates Impact Your Small Business?

Rising interest rates might be one of the biggest consumer finance stories of 2022 – but small businesses need to be every bit in tune with the changing interest-rate landscape, too.

After dropping its benchmark interest rate to nearly zero during the COVID-19 financial crisis, the Federal Reserve was widely expected to reverse course in 2022 and begin hiking rates again now that the economy was in recovery mode.

It has made good on those expectations. The central bank has lifted its Fed funds rate twice so far in 2022, by a quarter of a percentage point and then by a half a percentage point, to 0.75%-1.00% from 0-0.25% at the start of the year. And in fact, most market watchers expect the Federal Reserve to keep hiking its rate to cool down runaway inflation — Kiplinger, for instance, forecasts five more rate increases this year, to a rate of 2.25%-2.50%.

Most interest rates have soared as a result this year. The 10-year Treasury yield, for instance, has roughly doubled from 1.50% at the start of 2022 to as high as 3.00% recently. Mortgage rates have rocketed from 3.10% to 5.25% in that same time frame. Car loans, savings accounts, even consumer prices are other places where American consumers are feeling the brunt.

But they’re not alone. Small business owners have plenty at stake amid higher interest rates. Here are some of the things entrepreneurs need to know as rates continue to balloon.

4 Ways Rising Interest Rates Could Affect Your Small Business

More Expensive Business Loans

Whether your current cost of lending will continue to rise as interest rates climb depends on the nature of your small business loans. If you have a fixed-rate loan, you’re fine — your rate will remain the same. But if you have a variable-rate loan, your costs could continue to climb.

So, if you’re currently in a variable-rate loan, consider refinancing into a fixed rate. Doing so will both keep you from sweating future rate hikes, and allow you to more accurately plan your business’s finances going forward.

And if you were planning on borrowing, the longer you put it off, the higher your overall costs are likely to be, fixed rate or not. While there’s no guarantee the Federal Reserve will continue its rate hikes, there are myriad signals that it will. So you will likely get more favorable terms by borrowing sooner rather than waiting even longer.

Pricier Lines of Credit, Too

Lines of credit frequently come with variable interest rates, so rising interest rates could hit small businesses on this front, too. How much you feel the pain will also revolve around how large a balance you have.

Credit Card Debt … That’ll Cost More, Too!

Like some business loans and business lines of credit, credit card interest rates can be — and in fact, almost always are — variable-rate, unless you’re on a promotional rate. And while credit cards can charge extremely high rates, they’re popular financing options among small business owners, especially those unable to obtain more substantial methods of financing.

If you have an outstanding balance on your business credit card, you should pay off as much of it as you can. If you can’t, try using a balance transfer onto another card with a low promotional rate. And if possible, keep your balances on the card low.

A Slowdown in Business Growth

Like we mentioned before: The Federal Reserve is hiking interest rates because it’s trying to slow down red-hot inflation, which is occurring because of a surge in consumer demand (and in many cases, extremely limited supply).

The higher interest rates go, the more expensive it is for consumers to finance many larger purchases, from TVs to cars to houses. That should, in turn, cool demand for many of those products. However, in some cases, people who know they’ll need to buy a car or house regardless will skimp on buying other items so they can afford their big purchase.

None of that means anything good for small businesses. For example, if your company sells expensive machinery or high-priced tech, higher interest rates could dissuade customers who would need to finance their purchase. However, even if your company sells less expensive items, you might lose business as customers planning big-ticket purchases have to be more scrutinizing about their other costs.

Let Us Help You Draw Up a Financial Plan

McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that offers custom services to companies across a broad spectrum of industries. And we can lend a hand to companies trying to figure out their finances amid a rising-rate environment. We offer a wide variety of consulting services, and our experienced accounting team can even put you on the path to significant tax savings.

To learn more about what we can do to help your small business adjust to rising interest rates, call us at 440.892.8900 or contact us online today.

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