At first glance, it would seem that rising interest rates might be bad for small businesses. Wouldn't those higher Federal Reserve fund rates cause higher interest rates on consumer credit card balances? Higher loan rates? Wouldn't this cause reduced consumer spending? But this Forbes article by Brock Blake submits the contrarian view.
First off, it is the increase in the Federal Reserve funds rate which drives this increase in business and consumer interest rates. This is the rate that banks charge each other for overnight loans when they are short of cash. The prime rate, which is the rate the banks charge their best customers, is based on this rate. Most other consumer interest rates like those for adjustable-rate mortgages, credit cards, deposits, and bank loans are based on this prime rate. Higher interest rates, Blake states, could be good for small businesses.
Well, for one thing, rising interest rates are often a sign of a growing and improving the economy. So, the increased rates can be more than offset by increased business income. Also, the higher interest rates give banks and other lending institutions more incentive to make loans.
And there is no doubt that the economy is currently very strong. We are in a time of sustained growth of GDP and unemployment rates hover near historic lows. One cloud on the horizon could be the increased business costs due to tariffs, but as Jerome H. Powell, the head of the Federal Reserve, has commented, these tariffs have had no significant impact on the overall economy at all yet. Powell has also predicted that wages, although they have not yet risen significantly, will do so in response to low unemployment and strong business growth. Both the eventual economic effect of tariffs and the future rise of wages are currently uncertain, however.
Cash flow is very important to small business planning. The current economic conditions indicate that it might be favorable to some small businesses to seek financing now for loans for operations or if they anticipate cash shortfalls in 2019.
But for a complete financial analysis of your small business in complex and changing times, the wisest course of action is to seek financial and tax advice from professional experts such as those at Foster Financial CPA. Contact Foster Financial CPA today to help you determine how the present economy affects your particular small business situation.