- Fed raised rate by .75 points at each of the last four of its meetings
- The Fed funds rate is now up over 4%
- Fed officials are signaling the rate may have to rise up to 5% to 7% to combat inflation
- Variable interest rates will be affected, but it will affect all costs of borrowing
- You can lock into a lower financing rate to protect your business
The Federal Reserve is planning to increase interest rates in order to fight inflation. Already, there have been several increases to the Fed Funds Rate. This is the determinant in the cost of borrowing between banking institutions. Although it doesn’t have to be directly correlated to business or personal financing costs, it does have a ripple effect. This means that rising interest rates can mean a higher cost of financing for small business owners.
What do rising interest rates mean for small business?
In short, business financing will be more expensive. Whether your financing rate will skyrocket depends on how you finance. Most traditional lenders or financing companies attached to banks will likely have a small increase correlating to increases to the Fed Funds Rate. Some alternative financing institutions may absorb the higher cost of borrowing in their own business models. Some may pass along those costs to their customers. Overall, interest rate hikes mean you should take a look at your financing methods and the cost of that borrowing. If you don’t monitor your interest rates, there is a great chance you could be paying more for your financing.
What do rising interest rates mean for economic growth?
Higher borrowing costs are meant to slow economic growth. Inflation is the main reason for these hikes. Increasing interest rates is the one tool the Federal Reserve has in its armory to combat inflation. Slowing the economy could mean less sales growth for small businesses. Think of rate increases as tightening the belt on growth. This doesn’t have to mean that your business cannot grow during this time. Of course you can still grow. You just have to get skinny financially if you will be directly impacted by higher interest rates for your business financing.
How can you protect your small business from increasing interest rates?
The absolute first step you have to take is just reviewing your financing plan. Take a look at your financing contract and see if you have a variable or fixed rate for repayment. Many financing companies are fielding calls from disgruntled business owners because they increased their costs without clearly communicating the reasons. This is because a financing contract may include that language. It isn’t necessarily an honest practice to raise financing costs without notifying your customers, but it can be legal if it is in the contract that your rate is variable.
Next, consider switching your financing company if your rate increased. As stated earlier, some financing companies will take this opportunity to make their product more expensive. Other financing companies will absorb the increased cost until rate stop increasing. It really depends what financing product you use and what company you work with. This could be a time that you consider a fixed rate for your financing. Specifically at Eagle Business Credit, we have more control over what our financing rates look like. This is because we are not tied to Prime or LIBOR rates. As an independent financial services company, we are not a division of a large bank. More flexibility in decision making is built-in to our business.
Aside from locking into a rate, keep an eye on what your financing cost is. Then, consider less expensive options. Don’t be afraid to research the alternative options for business financing other than a bank loan or line of credit. There are many great financing companies willing to fund new or growing businesses without hurting your profit margins.
How do increasing rates affect Eagle Business Credit?
Eagle is an independent factoring company, and while our pricing relies on market conditions like all businesses, it is not a cut and dry increase in pricing when the Federal Funds Rate increases. We have more flexibility and control over our cost of factoring, and we like to keep factoring costs as low as possible. This may seem counterintuitive when all businesses want to maximize their revenue, but our revenue is reliant on the strength of our customers. It is in our best interest to keep our pricing low, so when our customers grow, they factor more invoices with us. We think it makes the most sense to grow our business alongside our customers growing theirs.
If you are concerned about the rising cost of borrowing or just exploring your business financing options, we are happy to help. You can explore how invoice factoring can help you continue growing without the extra costs of rising interest rates. We grow small businesses of all shapes and sizes, and especially during slow economic times, factoring is a great financing solution.