Earlier this season, the Federal Reserve shocked the fiscal world by deviating from the path toward an increase in interest rates. Historically, the United States has never been in this position, and interest rates have remained near zero percent for more than nine years. This fact has given businesses the opportunity to shed fat and improve overall business practices by investing more capital into the business; however, the age of zero percent interest is rapidly drawing to a close. As it stands the Federal Reserve is expected to definitively raise interest rates in December. Business owners must understand how this will affect sales, consumers, and business plans.
Potential Impact on Businesses
The chief impact from an uptick in interest rates affects businesses and consumers alike. Businesses could see a dramatic decrease in their volume of sales and in the average amount per transaction. Businesses may also see a gradual increase in business as the higher interest rates become acceptable to the public.
For example, higher interest rates mean higher increases on lending sources. Yet, the interest rate hike will also bring forth higher interest rates for banking accounts, which will further improve consumer spending habits. In an opposing scenario, consumers will be more likely to avoid making superfluous purchases until monthly budgets have adjusted to the change in interest rates. To further understand the impact of the interest rate on businesses, consider how it affects funding for businesses.
Effect on Funding Sources
Businesses, particularly small to mid-sized businesses, often rely on access to working capital to endure slow periods of sales. The rate hike would mean applying and receiving access to these funding sources, such as a short-term, business loan would result in a higher cost to the company. Some companies will be unable to meet lenders’ requirements, and lending options may be unavailable. Furthermore, businesses need additional working capital to grow rapidly, and the rate hike will have a similar consequence on their ability to access such resources. This may include higher interest rates on loans, mortgages, and rental properties. Essentially, the rate hike means businesses will be spending slightly more than they have grown accustomed to over the past decade.
Consumers and the Rate Hike
Consumers see the rate hike as a two-fold process, and many believe the consequences and benefits will counter-balance one another. For consumers, the rate hike may impact monthly allowances for expenses, which directly impacts businesses. Furthermore, higher interest rates for businesses will translate into an increase in the cost of goods and services. Therefore, consumers will be less willing to spend additional money for unneeded purchases.
Consumers must also face the uncertainty of mortgages. Variable-rate mortgages will result in an increase in monthly payments for the mortgages of this group of consumers.
While the initial view of the interest rate hike seems ominous, information and understanding hold the answer to your concerns. If you take a few extra minutes to think about how the rate hike will affect your overall cost and your consumers’ budgets, you can prepare for the change. You can look for ways to reduce your overhead costs and improve customer relationships. Consumers want companies they can trust, and if you look at how the rate increases affects them, you will gain a powerful ally in the pursuit of business-success.
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