Market participants have expected a rate hike this year and it seems all but certain that the rate hike is to come in the final Federal Reserve meeting on December 15-16, 2015. Most of the news surrounding the rate hike has been about whether or not the Fed should act. Regardless of when the Fed acts, the question for many small business owners is how it will impact their business.
We will first cover at a high level what is theoretically supposed to happen in a rising interest rate environment and then talk more in detail about how it may or may not affect your small business.
A rising interest rate means that treasury bonds, essentially loans to the Federal Government of US, will pay a higher interest rate amount. Since treasury bonds are considered among the safest assets in the world, this means that riskier, such as stocks should pay a higher return. The expected reaction is that stock and bond prices will fall as the Fed raises rates.
This makes sense if you think about the options for where to invest your money. If a checking account has a return rate of 10%, then potentially more risky investment like real estate or stocks would have to pay higher returns.
So how does this affect small businesses and their owners?
A Federal Reserve rate hike has a different kind of impact on small businesses then it does on large businesses and the markets overall. There may also be some benefits or positives to a rate hike.
Higher rates means that rates on everything from mortgages, to personal loans are expected to have a higher rate attached to it. This means that companies of all sizes will likely have a higher cost of capital associated with borrowing. It is important to note that rates won't double or triple overnight though. The Fed is only expected to raise rates 0.25% and there is no indication when or if another hike will happen after that, although one is expected. The Fed knows that too fast or steep of a rate hiking could send the economy spiraling back into a recession, as businesses and individuals slow down borrowing and spending money. Thus, while a rate hike can be a negative; such a low rise in rates will be negligible.
Can higher rates actually help me?
The Federal Reserve has said it will only raise rates if it believes the economy is healthy and can absorb it. This means that the smartest economists in our country believe the economy is doing well enough to absorb a rate hike.
This optimism should translate to a productive and profitable environment for the small business owner. Despite a higher cost of borrowing and expanding your business, an improved and growing economy should mean more sales for your business. Additionally, banks may become more willing to lend to lower credit rated businesses, expanding expansion capital for small businesses.
The long and the short of it
While a rate hike may mean that loans have a higher interest rate, the underlying economy is performing well meaning increased earnings and opportunities.
We will first cover at a high level what is theoretically supposed to happen in a rising interest rate environment and then talk more in detail about how it may or may not affect your small business.
A rising interest rate means that treasury bonds, essentially loans to the Federal Government of US, will pay a higher interest rate amount. Since treasury bonds are considered among the safest assets in the world, this means that riskier, such as stocks should pay a higher return. The expected reaction is that stock and bond prices will fall as the Fed raises rates.
This makes sense if you think about the options for where to invest your money. If a checking account has a return rate of 10%, then potentially more risky investment like real estate or stocks would have to pay higher returns.
So how does this affect small businesses and their owners?
A Federal Reserve rate hike has a different kind of impact on small businesses then it does on large businesses and the markets overall. There may also be some benefits or positives to a rate hike.
Higher rates means that rates on everything from mortgages, to personal loans are expected to have a higher rate attached to it. This means that companies of all sizes will likely have a higher cost of capital associated with borrowing. It is important to note that rates won't double or triple overnight though. The Fed is only expected to raise rates 0.25% and there is no indication when or if another hike will happen after that, although one is expected. The Fed knows that too fast or steep of a rate hiking could send the economy spiraling back into a recession, as businesses and individuals slow down borrowing and spending money. Thus, while a rate hike can be a negative; such a low rise in rates will be negligible.
Can higher rates actually help me?
The Federal Reserve has said it will only raise rates if it believes the economy is healthy and can absorb it. This means that the smartest economists in our country believe the economy is doing well enough to absorb a rate hike.
This optimism should translate to a productive and profitable environment for the small business owner. Despite a higher cost of borrowing and expanding your business, an improved and growing economy should mean more sales for your business. Additionally, banks may become more willing to lend to lower credit rated businesses, expanding expansion capital for small businesses.
The long and the short of it
While a rate hike may mean that loans have a higher interest rate, the underlying economy is performing well meaning increased earnings and opportunities.
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