Navigating Interest Rates: What Small Businesses Need to Know

Interest rates play a crucial role in determining the cost of borrowing money for small businesses. As they fluctuate, small business owners face many financial decisions that can significantly impact their growth and stability. Understanding trends in interest rates can help businesses make informed choices about borrowing, investing, and managing cash flow.


Monitoring Interest Rates

Bankers and economists watch several indicators to determine how interest rates might move. Many of these factors are publicly available and can be monitored directly by small businesses:

– Unemployment rates are published monthly by the Bureau of Labor Statistics. When unemployment rates are low, interest rates tend to increase.

– The Consumer Price Index monitors area of inflation. When inflation is high, raising interest rates tend to slow down the economy.

Bond prices are posted daily. Performance in the U.S. bond markets historically shows that interest rates rise as bond prices fall, so watching those prices could hint at potential interest rate movements.


The Role of Banks in Interest Rate Trends

Banks play a significant role in determining the cost of borrowing for small businesses. Banks borrow money at a base rate set by the U.S. Treasury, and then increase those rates as they relend money to corporations, small businesses, and consumers. For small businesses, the cost of borrowing is generally higher than for large corporations because they tend to have less money to make a down payment or fewer ways to guarantee repayment on a loan.


Practical Advice for Small Business Owners

Small business owners should work collaboratively with their bank to monitor interest rates. For small businesses that have a loan with a variable interest rate, their monthly debt payment will increase as interest rates rise; payments will become smaller as interest rates decrease. For small businesses with a fixed-rate loan, their payment will stay the same no matter how interest rates fluctuate, which is nice when a loan’s interest rate is lower than market rates but can sting when the interest rate is higher.

When a monthly debt payment becomes too expensive, there are many proactive options available to help small businesses manage their cash flow. Banks may be able to modify terms, temporarily lower payments, or refinance into a different loan structure. Discussing these options with the bank, as well as the overall financial health of the business, should be conducted on an annual basis.

It is important to evaluate all the reasons behind any financial decision. If a small business hesitates to invest or expand due to fear or lack of confidence, it might be a sign of deeper issues. Conduct a thorough analysis of the business to evaluate growth plans, sales figures, management structure, and labor force. If these areas are in a good place and the hesitation is due to uncertainty about interest rates, the advice is clear: borrowing under a known interest rate environment is smarter than waiting for interest rates to adjust.


Looking Ahead

Interest rates play a significant role in the success of small businesses. Understanding the trends and indicators influencing these rates can help business owners make informed financial decisions. Armed with this knowledge, small business owners can set themselves up for success to navigate a constantly changing financial landscape.