In the summer of 2022, inflation was more than 9%. Now, it is 3.2% thanks to the Fed’s rate hikes. As Kavan Choksi Business Consultant says, even though Fed has made substantial progress on inflation, it still remains above the Fed’s 2% goal. Rates have stayed stable at 5.25-5.50% since late July 2023. Even though the Fed has not changed the rates in a while, it is vital to understand how the Fed’s policy impacts small business.
Kavan Choksi Business Consultant talks about how Fed rate hike impacts small businesses
The federal funds rate (or Fed rate) is the target interest rate for commercial banks to borrow at. This rate is set by the Federal Open Market Committee (FOMC), which meets multiple times a year to evaluate and determine the target Fed rate. For the last couple of years, Fed interest rates have been a hot topic of conversation. Fed rate hike have impacted consumers and businesses in many ways.
One of the biggest negative impacts of Fed rate hike on small businesses is the cost of borrowing. When the Fed rate goes up, so does the interest small business owners have to pay on their lines of credit and loans, as lenders tend to charge a premium for borrowed funds. Owing to this increased expenses, several business owners delay applying for a loan or spend more time in repaying their existing lenders, which can limit their business growth.
Increased Fed rates lead to reduced consumer spending and more challenging access to loans, potentially hampering business growth. This can result in constrained cash flow due to reduced spending and a sluggish economy, making it harder to invest in expansion initiatives. Interest rates significantly impact small businesses; especially those depended on credit lines or loans for acquiring necessary equipment or space. If a business owner intends to secure a loan for expansion, such plans might be postponed until interest rates decrease.
When interest rates go up, the cost of borrowing does not become more expensive just for businesses. Consumers feel it’s burnt as well. Consumers have to make higher payments for car loans, mortgages, and student loans; as a result, consumer spending slows down. This ultimately leads to less shopping at small businesses across the nation. During economic downturns, usually business spending increases, and both B2C and B2B businesses alike feel this dip in revenue.
As Kavan Choksi Business Consultant says, when consumer spending slows down, businesses must prioritize managing their cash flow properly to avoid getting stuck in a cycle of negative cash flow. Systematically managing debt payments, evaluating the pricing structure, as well as negotiating better payment terms can help business owners to improve cash flow during an economic downturn.
As commercial interest rates increase during a Fed rate hike, it may take business owners more time to pay off their existing loans. They may even be forced to allocate more cash to debt repayment, which can cause other areas of their business to suffer, including plans to buy more equipment or hire more employees.
