Last December, the Federal Reserve announced that it was raising the Federal Funds Rate (the rate at which banks borrow money from each other overnight) by a quarter of a percentage point, and would likely be making additional rate hikes in the near future.
What does this rate increase and those to come mean to you? SurePayroll found that 45% of small business owners did not think the interest rate increase would have any effect on them. On the other hand, 42% thought that the increase would have a negative impact. Most interesting to me was the fact that 13% thought it would be a positive thing for their businesses.
Meaning of higher interest rates
The fact that the Federal Reserve raised interest rates indicates that the economy is stronger and can support the higher rates. A growing economy is good for small businesses in general. Small business owners are generally optimistic about the economy, although less so than a year ago, according to the same SurePayroll survey.
Direct impact of rate increases
Many businesses that depend on borrowing to financing their operations are paying more for their debt service. It costs more to pay down lines of credit and other borrowing that has a floating rate, leaving less money to pay for other things, such as staff and marketing. Having to pay more in interest has a negative impact on cash flow. If you find yourself in this situation, consider trying to pay down your variable rate debt now.
If you have a need for capital, look into alternative borrowing options. These include:
- Alternative lending. Borrowing through such venues as Kabbage and OnDeck may meet your needs; interest rates here are not closely tied with the fed funds rate.
- Merchant cash advances. These are loans against credit card receipts; they already have very high interest effective rates. One option: RapidAdvance
- Factoring. This is lending based on your outstanding invoices. Your credit rating does not impact this borrowing alternative. One option: Fundbox
- Traditional crowdfunding. This could be done by seeking donations for a special project or borrowing at rates you agree upon with the lender.
Also, work on improving your personal credit rating. The higher your FICO score, the less you’re likely to pay on business borrowing.
Instead of borrowing money, consider equity options. You have to give away a part of your business to an investor, but you don’t have any repayment obligation. There’s no adverse impact on cash flow. With issuance last year of regulations on equity crowdfunding, this option could become more prevalent this year. One option: EquityNet
CrowdsUnite is a directory of all types of crowdfunding platforms.
Indirect impact of rate increases
We have to think about what rate increases do to consumers because this impacts their buying ability. The minor rate hike that just took place likely isn’t significant enough to influence consumer purchasing. However, if rates continue to raise and consumers are forced to pay more for all of their borrowing, including credit card financing, then they have less money to spend with you.
Conclusion
Henry Ward Beecher, a 19th century clergyman and abolitionist, said “Interest works night and day in fair weather and foul. It gnaws at a man’s substance with invisible teeth.”
Work with your team to reduce or eliminate your debt so you can run your company without big concerns about higher interest rates.
