When the Fed announced on December 16th that it was to raise interest rates by 25 basis points, it hardly came as a surprise to many in the US; after seven years without any rate hikes, the question was more a case of when it would happen rather than if.
Many small business owners would be forgiven for asking what a rise in interest rate means in practical terms. After all, US Census data shows that over 500,000 new companies register every year. Even allowing for the failure of some businesses, we can safely assume that close to 2 million small business owners had never dealt with the issue of a rate hike before.
The good news is that a quarter of a percentage point will not represent a significant departure from business as usual. Unless their financing is on a knife edge, most small business owners won’t even notice a difference. However, the hikes can safely be viewed as a first move towards a mid- to long-term of a significantly higher rate.
The move will be gradual and most likely in small, similar increments to that of December’s rise. Being prepared for it is important, nonetheless. Interest rate rises affect everyone in the economy to some extent, and given the economic realities of small business, it arguably affects them more than any other.
If your small business has debt, short-term or long-term, now is a good time to start considering hypothetically what an extra 25 to 50 basis points on top of your current loan servicing would mean. Would changing to a fixed rate loan give allow you to make longer term plans for the business?
It’s never a bad time to think about your firm’s medium to long-term goals but the indication of an interest rate rise on the horizon makes it an imperative. Will you company need financing for capital in the next two years? Are you planning to expand the business from its current location? Essentially, everything that requires financing requires extra consideration.
And the longer term? To paraphrase the noted economist John Kenneth Galbraith, the only purpose of predicting interest rate hikes is ‘to make astrology look respectable.’ That said, with interest rates still hovering at historically low levels, it would seem as though the only way is up.
If and when rates appear on the horizon, your small business may notice changes in consumer behavior – as a rule, they’ll consume less at nearly all levels of income. Likewise, other stakeholders, such as suppliers, will be adapting to the changes, and as a result, you may notice increased volatility in your business cycle.
In short, interest rate hikes are a reality for every business and should be treated as such. Through proper planning and anticipating where your business is likely to require and obtain funds in the coming years, there’s absolutely no reason to fear for its future.