You have probably heard the reports that interest rates will rise sharply. If you operate or own a small business, though, you may not be aware of what that means for your company. In this article, we will talk about what small businesses can expect from climbing interest rates.
What Are Interest Rates?
Before we get into what small businesses can expect as interest rates climb, you should understand what we mean when talking about this term. An interest rate is a percentage of a loan that is charged as an additional payment for which the borrower is responsible.
In other words, say you’re opening a modest-sized business, and you’re looking into small personal loans from a bank or credit union. You find a credible lending entity that thinks your business model has potential. They might offer you a loan, and that loan will come with an annual percentage rate that you must pay back on top of the principle.
This is one of the main ways that lending entities make money. At times, certain economic factors will dictate that interest rates remain low. Interest rates can also rise steeply, as we are seeing right now.
As someone trying to get a small business off the ground, you might rely on a loan that comes from a credit union, bank, or another entity. You’ll need funds for things like property rentals, equipment rentals or purchases, employee payroll, marketing, etc.
At times like this, with interest rates rising sharply, loans will cost more. A loan for an amount that you get this year might come with a higher interest rate than would have been the case for that same loan just a year ago.
However, if you already have a fixed rate in place for your business loan, rising interest rates will not affect it. Fixed-rate loans are immune to interest rate increases.
If you have a variable-rate loan, that’s when you might feel the pinch as interest rates rise. Business lines of credit and other variable-interest loans will cost your business more as interest rates creep up.
More Business Credit Card Debt
The other way rising interest rates can potentially impact small businesses is that you’ll see higher credit card interest rates. If you have a business credit card that you use for company purchases, that could mean higher monthly payments.
Keep in mind, though, that if you don’t carry a balance on your business credit cards, rising interest rates will not impact you. If your small business is making enough profit that you don’t carry a balance on your credit cards from one payment period to the next, you won’t have to worry about rising interest rates.
Rising Interest Rates Might Impact Small Businesses
If you operate or own a small company and you’re keeping an eye on rising interest rates, they can impact you in two specific ways. The first is if you have an existing business loan that does not come with a fixed rate.
A variable rate like you would get with a business line of credit means you’ll have to pay more money because of the higher interest rate. That’s only true if you’re using any of that line of credit for business-related expenses.
The other way rising interest rates can impact your business is if you use company credit cards and you’re carrying a balance from one payment period to the next. If you are, expect to pay more money in interest, which can hurt your company’s solvency.
However, keep two things in mind. First, if you have a fixed-rate interest loan for your business, rising interest rates won’t impact it. Second, if you pay off the balance on a business credit card without carrying it to the next pay period, rising interest rates won’t cause you to pay any additional money to the card company.