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How are Businesses Coping with Rising Interest Rates?

June 06, 2023

At its last meeting, the Fed raised the target range for its benchmark interest rate by 0.25%, to its highest level since September 2007. What impact does this have on business? We explore here.

As interest rates continue to climb, businesses are dealing with ongoing difficulties surrounding borrowing costs, price stability, available capital, volatility, cash flow and more. How are businesses coping? We share our thoughts here.

What happens when the Fed raises interest rates?

By raising interest rates, the Fed aims to slow economic activity and combat high inflation. This, in turn, makes it more difficult for businesses to borrow funds, reinvest capital and hire workers.

4 key impacts of interest rate hikes

1. Borrowing costs on the rise- To offset higher working capital costs or invest in growth opportunities, many business owners opt to take out loans, but interest rate hikes impact their ability to borrow larger amounts and/or pay back debt. Higher borrowing costs can reduce profitability, limit growth opportunities, and potentially lead to an overall decline in business investment.

How are businesses coping? In today’s marketplace, some companies may decide to seek out a non-controlling equity partner/investment, liquidate assets, and convert loans from variable rates to fixed rates to prevent the cost of debt from spiraling out of control. It’s also important to work with lenders to adjust loan covenants as needed to match the current economic environment.

2. Hiring- When businesses face higher borrowing costs, they may scale back on expansion plans, delay hiring decisions, or even lay off workers. Additionally, businesses may still be facing pressure from “The Great Resignation” and a competitive labor market, making it more and more difficult to offer attractive compensation packages.

How are businesses coping? Searching for the right candidate. Certain candidates are seeking benefits beyond compensation. These include:

  • A great work culture,
  • Flexible remote capabilities,
  • A good team, and
  • To feel valued by their employer

3. Impact on stocks and bonds: A higher interest rate environment may reduce the appeal of certain investments, such as bonds or stocks while increasing the appeal of government issued securities, CDs and money market accounts, as investors seek safer returns. Consequently, this shift in capital and reallocation of investments can affect financial markets, causing volatility and fluctuations in stock prices and bond yields.

How are businesses coping? To protect against potential risks, investors might choose to reconfigure their investment strategies and proactively meet with their investment advisors.

4. Decreased consumer spending: Rising interest rates can make borrowing more expensive for consumers, affecting their purchasing power. This can lead to reduced consumer spending, particularly for big-ticket items like cars and durable goods. Businesses that rely heavily on consumer demand, such as retail, hospitality, and automotive sectors, may experience lower sales.

How are businesses coping? Many businesses have benefited from diversifying product offerings, adjusting pricing and promotions, offering discounts and exploring new markets. Streamlining operations when possible has also helped—optimizing processes and using automation can free up time, money and manpower.

Questions? Contact us.

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