How Interest Rates Affect Business Operations

Changing interest rates can influence your short- and long-term business decisions.

Understanding the potential effects of high interest rates can help you keep your business operation flexible and competitive during economic upheaval.

Interest rate fluctuations are often the direct result of policies enacted by the Federal Reserve and Central Bank based on demand for goods and services. Higher demand over time tends to result in increased costs, which is inflation, so the Federal Reserve raises interest rates to restrict currency with the ultimate goal of lowering inflation.

High interest rates may result in:

• Reduced consumer spending
• Increased borrowing costs
• Higher operating expenses
• More emphasis on cash flow
  
  

However, according to our wealth management team, it can take time for your business to experience the effects of changing interest rates and inflation.

Cash flow management is crucial as it protects operational continuity, supports debt repayment and builds cash reserves. Maintaining higher cash reserves when interest rates are low is common since interest-bearing accounts offer minimal return. Conversely, you may consider investing cash into a money market account during a high-interest-rate environment to generate a better return. It’s also important to reduce debt as much as possible when interest rates increase.

The cost of borrowing grows alongside interest rates, so it may be more expensive to finance projects and growth during times of high interest.

You Can Mitigate Risks By:

• Using more cash and less debt
• Identifying creative ways to push your goods and services

Monitoring inflation trends, Federal Reserve policies, and energy policies can also help you forecast the impact of interest rates on your business operations.

Contact our Wealth Management Team to learn more about managing your business's wealth during interest fluctuations.