On September 17, the Federal Reserve announced that it would not increase interest rates. There’s been no increase since the current rate was set on December 16, 2008. Rates could be hiked slightly in October or December.
For most small businesses, whether rates stay the same or are increased slightly is of little concern. However, some businesses could be impacted if and when rates increase. Here are some situations to think about:
Outstanding lines of credit. Businesses that have loans with rates that can be adjusted may have to pay more for the money they’ve already borrowed. This can impact cash flow, although only modestly. For example, a business that borrowed $100,000 would pay only about $12 a month more in interest if there were an increase of a quarter of one percentage point.
New borrowing. For businesses that anticipate the need for a new loan in the near future, acting sooner rather than later may enable them to lock into the current low rate. Again, there could be a little savings on interest, which would be helpful to cash flow. However, a slight rate hike, such as an eighth or a quarter of a percentage point, isn’t a make-or-break factor in deciding to get a loan. You can find a discussion of current SBA loan rates here.
It should be recognized that an increased interest rate environment may entice lenders to act because they’ll be earning more. Thus, it may become easier to obtain a loan when rates rise.
Customer spending. While a business’ direct costs may not be impacted by a slight rate increase, revenues could be affected. If customers feel poorer because they’re paying more on car loans, credit cards, and other borrowing, they may spend less. Of course, the flip side is that customers with CDs and other interest-sensitive investments may feel slightly better off and may be willing to spend more.
Conclusion
Focusing on interest rates may be a big distraction for small businesses. Any increase will be modest when it comes, and will indicate that the Federal Reserve thinks the economy is doing well. Let’s hope that this time will come soon.
