Recently, the Federal Reserve announced its decision to increase interest rates since the economy is doing fairly well as of now. The Federal Reserve has also said that it will be hiking key rates again in the future. While the fact that the economy is doing extremely well is great for businesses, the rising interest rates will mean that businesses will find difficulty in borrowing money while trying to raise capital. Small businesses are likely to be caught between a rock and hard place and will need to navigate the high-interest rates smartly.
How small businesses are affected by the rising rates
The CEO Jared Hecht of Fundera, an organization that provides loans for small businesses, has said that the increased rates have not yet reflected on the rates for small businesses. This is because it will take some time for the hiked interest rates to reflect on loans for small businesses since it is not directly dependent on the Fed's rates.
The rates will, however, soon start to reflect the increased interest rates once the changes have been accommodated. The marketplace will soon become highly competitive in terms of lending since backs find it much easier to manage loans when the interest rates are high. The interest rates were raised in March from 1.5 percent to 1.75 percent. By June, the interest rates are expected to be raised by a quarter point more.
Small businesses are likely to find that their costs have increased with rising interest rates and this applies not only to new loans but also to variable loans that depend on the interest rates set by the Federal Reserve. Many small business owners fear that a higher interest rate will affect the cash flow and profits since loans get rather expensive. The higher the interest rates, the more difficult it is to acquire funds and capital for expansions, buying new machinery, and so on.
Consumers may soon have to cut back on spending
Consumers are also in for a shock. Although the economy is doing well and has boosted consumer confidence, rising interest rates will soon start to affect their disposable income and many consumers will soon find the need to cut back on spending to manage the increased expenses.
Financial experts advise both small businesses and consumers to clean up existing debts and credits before the Fed's rates start to kick in.